Overseas Education - UOB Kay Hian 2015-10-26: Weak Outlook But Cost Control In Place

OVERSEAS EDUCATION LIMITED RQ1.SI

Overseas Education (OEL SP) Weak Outlook But Cost Control In Place

Inevitably, OEL will be impacted by the slowing economy which has led to restructuring in several MNCs and a decline in student enrolments as parents relocate out of the country. As such, its share price has already declined 25% ytd as investors have priced in slower revenue growth and higher operating expenses at the new campus.
We lower our target price by 12.7% to S$0.89, to account for the reduction in earnings forecasts for 2015/16, but maintain our BUY recommendation.

revious CFO Wong Juan Meng had recently left the company to pursue personal interests and hence, Overseas Education (OEL) has appointed Mr Ho Hie Wu to take over her position. We took this chance to touch base with the new CFO as well as get an operational update from the management.

Mr Ho has been with the school since Jul 12 and is presently the Director of Finance and Planning at OEL’s principal operating subsidiary, Overseas Family School Limited (OFS). Mr Ho was previously the Director of the Audit and Business Advisory at PricewaterhouseCoopers Singapore, with 20 years of audit and advisory experience in the firm.

OEL lost 230 junior students due to the shift from Paterson to Pasir Ris while another 460 students left the school as their families were relocating out of Singapore. Netting off new entrants and the graduating cohort, we estimate that overall enrolments declined 10% in the school term starting Aug 15. However, OEL has increased school fees by 10% to account for the new facilities and this should offset the lower enrolment numbers, in our view. The number of students fluctuates within the 1-2% range as students get enrolled or exit during the school term.

The new Pasir Ris Campus is four times as large as the old school but management assured that utilities expenses will not escalate to the same extent. In addition, OEL used to incur more than S$1m in upkeep and maintenance costs annually for the previous run-down Paterson Campus and does not expect to incur as much as most of the facilities are still under warranty. Staff costs (2014: 75.5% of costs) remained as OEL’s main operating expense and with lower enrolment, we also do not expect a significant increase in 2H15.

We had highlighted to management that the probable reason behind the 25% ytd drop in share price was that investors were concerned about its enrolment outlook as well as the increase in operating expenses with OEL having moved into the new school.
However, we are also of the view that with its strong operating cash flow and the S$150m bullet bond redemption on track to take place in 2019, the company will be debt free eventually. By then, OEL will be generating free cash flow at a rate of S$36m every year throughout the 24-year lease period of the school, vs its current market capitalisation of S$262m.
To recall, the school collects school fees upfront for the term (6 months ahead) before disbursing the expenses on a monthly basis and these fees are only refundable on a case by case basis.

With lower enrolment and higher utilities expenses, we reduce our estimate and expect OEL is to generate a net profit of S$20.5m in 2015 and S$21.2m in 2016, a reduction of 12.4% and 31% respectively.
OEL is to report its 3Q15 results in mid-November and we estimate the net earnings to be at S$4.8m as compared with S$5.2m in 2Q15 due to a higher utilities bill.

Maintain BUY but with a reduced target price of S$0.89, based on a two-stage DCF valuation (cost of equity: 8%, terminal growth: 1%), which implies 17.4x 2016F P/E.

Brandon Ng CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-26

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.89 Down 1.02