RHB Research 2015-07-27: Overseas Education Limited - A Dislike For School. Initiate with SELL.

A Dislike For School

  • We initiate coverage on OEL with a SELL and a DCF-derived TP of SGD0.70 (a 17% downside.) 
  • The current immigration policy is unsupportive of foreign talents growth; also, the change in campus location from Orchard to Pasir Ris makes us believe OEL’s outlook would be disappointing. 
  • We expect the increase in fees to result in revenue CAGR of 5% over the next 3 years, but net profit may trend lower due to a higher interest expense and depreciation and amortization (D&A). 

 Third largest foreign system school (FSS). 

  • Overseas Education Limited (OEL) is the 3 rd largest FSS in Singapore and provides K-12 International IB programme for foreign students. 
  • With the completion of its new campus at Pasir Ris, tuition fees will be ~10% higher in the new academic year; also the new school‟s approved capacity will increase by 23% to 4,800 students. 
  • However, the switch in location to a less prime area has resulted in lower enrolments. 

 Tighter immigration policy caps FSS demand. 

  • In response to Singapore‟s concern on the influx of foreign talent, the government has curbed immigration and kept expat growth at 0.7% CAGR over 2011- 2014. 
  • Recently, the Ministry of Manpower (MOM) announced an increased scrutiny on the employment of foreign professionals. 
  • In view of an upcoming election, the trend is not expected to be reversed in the near term which may leave OEL with a stagnated pool of foreign students despite its bigger facility. 

 Competition from new players may intensify. 

  • In 2014, two new FSS, Dulwich and GEMS, set foot into Singapore. 
  • While OEL saw registration revenue dropped 1.4%, Dulwich enrolled 920 new students for its first academic year. 
  • This year, the government further conducted a new exercise to invite foreign schools to set up in Singapore hence, competition should intensify. 

 Initiate with SELL and a DCF-derived TP of SGD0.70. 

  • We expect net profit to trend downwards into FY16F due to a higher interest expense and D&A. 
  • Even though OEL generates ~SGD30m of operating cash flow per year, we expect its dividend to be flat as we believe OEL will be accumulating cash to pay off its SGD150m bond due in FY19F. 

 Key upside risks. 

  • A reversal of immigrant policy could boost the pool of students available for FSS and potentially improve OEL‟s revenue. 

(Juliana Cai)

Source: http://www.rhbgroup.com/