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Overseas Education - DBS Research 2015-11-12: Cash Generative Business Model

Overseas Education - DBS Research 2015-11-12: Cash Generative Business Model OVERSEAS EDUCATION LIMITED RQ1.SI 

Overseas Education - Cash Generative Business Model 


Positive free cashflow from FY16F onwards  

  • Overseas Education (OEL) presents a highly cash generative business, with operating cashflow growing at 10% CAGR over 2010-2015. Though free cashflow will still be negative as a result of the new campus, we expect it to turn positive from FY16F onwards. 

Near term hit by drop in enrolment 

  • Near term, OEL is affected by the withdrawal of students at all levels due to family relocation away from Singapore. 
  • We cut FY15 enrolment to 3,000 or about 63% of total capacity of 4,800 students for the new campus. This number is also 17% lower than FY14’s enrolment of about 3,600 students. We expect a gradual improvement in enrolment from FY16 onwards. 
  • Maintain HOLD, TP cut to S$0.71, after imputing lower enrolment and higher costs. 

Valuation: 

  • We use a Discounted Cash Flow (DCF) valuation methodology to capture the cash generative business of OEL in the medium and long term. 
  • We see tuition fee hikes and gradual improvement in enrolment as the key levers to lift earnings from FY16 onwards. 
  • Based on our assumptions of 6% weighted average cost of capital on the projected free cash flow forecast, our DCF-derived target price of S$0.71 translates into 18x FY15F PE and 17x FY16F PE. 

Risks: 


Drop in enrolment. 

  • Tuition fees forms the bulk of the revenue. A drop in enrolment will result in lower revenue. Operational. Operational. A rise in personnel expenses and retention of teaching staff. Competition. Currently, there are over 30 international schools in Singapore.


LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2015-11-12
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.71 Down 0.84


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