RHB Securities 2015-08-18: Overseas Education Limited - Results That Dropped Out.

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OVERSEAS EDUCATION LIMITED RQ1.SI

Results That Dropped Out. 

• OEL’s 2Q15 results were in line with our expectations. 
• Maintain SELL with DCF-derived TP of SGD0.70 (9% downside). 2Q15 PATMI fell 5% YoY to SGD5.2m, bringing 1H15 PATMI to SGD10.9m, which made up 49% of our estimate. 
• We continue to be concerned about a limited pool of students available for the Foreign System School (FSS) in Singapore. 
• We also note that the lower net enrolments in 1H15 may weigh down future revenue from its tuition fees. 

 Overseas Education (OEL) posted SGD25.1m revenue in 2Q15. 

• In line with our expectations, revenue declined 5% YoY. This was mainly due to lower enrolment in its junior schools, which led to a 4% drop in tuition fees collected. This in turn hurt bookshop sales, as well as revenue from its enrichment programme. 
• Management reported that the global economic contraction is reducing the pool of students for the FSS. As such, while OEL raised school fees by 10% for the 2015/2016 academic year, we remain pessimistic about OEL’s ability to raise school fees and increase its student numbers in the years ahead. 

 Dropout rate exceeds new enrolment. 

• Current new enrolments for this academic year (2015/2016) only replaced 60% of the total number of student withdrawals. About two-thirds of these students dropped out because of family relocation out of Singapore, while the remainder transferred to other schools in Singapore as a result of OEL’s relocation to Pasir Ris. 
• As such, although OEL will continue to enroll new students throughout the year, we believe 2H15 will end with lower student numbers than 1H15. 

 Maintain SELL with DCF-derived TP of SGD0.70. 

• We maintain our SELL recommendation with DCF-derived of TP SGD0.70, implying 13.2x FY15F P/E, with no change to our estimates. The transfer of 230 Junior students to competitor schools depicts vacancies in other schools as well as a retraction from OEL’s new location at Pasir Ris. 
• Compounded by the Ministry of Manpower’s (MoM) tightening of the regulations for expatriate employment – which aim to strengthen a core Singaporean workforce – we do not see a recovery in FSS demand in the near term.

Juliana Cai | http://www.rhbgroub.com/ RHB Securities 2015-08-14

SELL Maintain SELL 0.70 Same 0.70