Overseas Education (OEL SP)
- School Fees Adjustment Higher Than Expected
- OEL announced the TOP of the Pasir Ris Campus and the revised school fees for the new term starting Aug 15. The average fee increase of 11.4% is higher than our forecast of 8%.
- Thus, we raise our 2015 and 2016 net profit forecasts by 5.4% and 2.3% respectively.
- Maintain BUY with a higher DCF-based target price of S$1.02.
WHAT’S NEW
- Share price has risen 5% since our stock upgrade in March. We see further scope to increase our earnings forecasts and target price.
- Overseas Education (OEL) has received temporary occupation permit (TOP) from the Building and Construction Authority (BCA).
- It has also raised school fees for the new term starting Aug 15 by a significant 9.1-30%.
ESSENTIALS
Moving into the new campus.
- The new campus comprises two 11-storey teaching blocks, a seven-storey administration block, covered car park and a bus park for over 100 buses, among other amenities.
- The campus can cater up to 4,800 students as compared to 3,600 in the Paterson Road campus.
- If OEL is able to demonstrate traffic control with minimal congestion in the area, it can apply to the authorities for an increase in enrolment numbers.
Higher-than-expected increase in school fees.
- We had expected the increase to be more subtle at 8% vs an average of +11.4% in the five schools as indicated by OEL.
- We believe the adjustment is a tactical move as OEL’s school fees will now be in line with the industry average, albeit in a newer facility.
Likely to fill up student capacity, given proximity to major industrial parks.
- OEL had experienced a drop in enrolment at the Paterson campus in the last three quarters as parents pulled out students in the junior school ahead of the move.
- However, we are confident that the school can make up for the student number decline, given the campus’ proximity to Changi Business Park (9.4km), Seletar Aerospace Park (14.3km) and Tampines Hi-Tech Park (4.7km).
- United World College of South East Asia-East Campus is the only campus in the area (1 Tampines St 73) which is still charging slightly higher rates than OEL’s if we include all the other additional fees.
EARNINGS REVISION/RISKS
Positive adjustment to earnings forecasts.
- Given the higher school fees, we increase our 2015 and 2016 net profit estimates by 5.4% and 2.3% to S$23.4m and S$30.8m respectively.
VALUATION/RECOMMENDATION
- Maintain BUY with a higher target price of S$1.02 to account for the higher-thanexpected increase in school fees.
- Our target price is based on a two-stage DCF valuation (cost of equity: 8%, terminal growth: 1%), which implies 18.0x 2015F PE.
- We believe investors would appreciate OEL’s sustainable business (30-year lease for the new building), strong cash flow generation (fees are collected before term starts) and inelastic client demand (parents are most likely to let their children go through the entire curriculum regardless of fee adjustment)
(Brandon Ng, CFA)
Source: http://research.uobkayhian.com/
