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UOB Kay Hian Research 2015-07-20: Overseas Education (OEL SP) - Brand New Term, Brand New Campus. Maintain BUY.

Brand New Term, Brand New Campus 


  • OEL conducted an investor open house for its new campus in Pasir Ris. 
  • We came away impressed with the new school, which is a stark improvement from the Paterson road campus that had been in operation since 1991. 
  • School fees have been adjusted higher by an average of 11.4% and management is confident that parents will take it in stride given the new facilities. 
  • Maintain BUY with a DCF-based target price of S$1.02. 


WHAT’S NEW 


• It’s an open house! 

  • OEL conducted an investor open house and we came away impressed. 
  • School fees were adjusted higher to be in line with industry average and management is confident that enrolment should improve after seeing a drop in the last four quarters, particularly in the junior school. 


ESSENTIALS 


• Moving into the new campus. 

  • The new campus comprises two 11-storey teaching blocks, a seven-storey administration block, a covered car park and a bus park for over 100 buses, among other amenities. 
  • The number of teaching classrooms has increased 50% from 160 to 240 and students per classroom have been kept at a comfortable 25:1. 
  • OEL has also paid special attention to the traffic flow of school buses, building alighting bays that are able to accommodate a few buses at one time. 

• Operating costs to see a jump as GFA quadruples to 100,000 sqm. 

  • OEL had started operations of the new campus since May but believes that they will only be able to get the full gauge of the expenses once school reopens. 
  • Although the building contractor has made a conscious effort in putting in many energy-saving initiatives such as LED lightings and an efficient air conditioning system, we still expect running expenses to jump given the magnitude of the school with escalators and heavy-duty lifts. 
  • Utilities, maintenance and other operating expenses accounted for 10% of total operating expenses in 2014 while personnel expenses contributed the bulk of it (2014: 75.5%). 
  • On that note, we have already penciled in a 24% rise in total operating expenses for the new campus in our forecast. 

• It takes time but it will get there. 

  • Management has not seen a significant drop in enrolment since the move despite the distance and fees adjustment, and has also seen a healthy increase in enquiries from the vicinity. 
  • While it may take time to increase the enrolment from the current 3,600 to the allowed capacity of 4,800, we are confident that the school will achieve the intended capacity given its strong standing reputation in the Singapore, 


EARNINGS REVISION/RISKS 


• No change to our earnings forecasts. 

  • We expect OEL to generate a net profit of S$23.4m and S$30.8m in 2015 and 2016 respectively but investors should note that its 3Q15 results will be out in November. 
  • 3Q15 is the starting term of operations in the new campus and would set the tone for the next three quarters. 


VALUATION/RECOMMENDATION 


  • Maintain BUY with a target price of S$1.02, based on a two-stage DCF valuation (cost of equity: 8%, terminal growth: 1%), which implies 18.1x 2015F PE.


(Brandon Ng, CFA)

Source: http://research.uobkayhian.com/




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