Overseas Education Ltd - CIMB Research 2015-11-16: Bring the kids to school!

OVERSEAS EDUCATION LIMITED RQ1.SI

Overseas Education Ltd - Bring the kids to school!

At 72% of our FY15 forecast, 9M15 revenue was impacted by student enrolment.
Due to lower-than-expected operating expenses, 9M15 core net profit was in line at 74% of our FY15 estimate.
Macroeconomic concerns and intensifying competition cloud OEL’s outlook.
Declared FY15 special dividend of 1.375 Scts/share.
Lower DCF-derived target price of S$0.74 (WACC:8%), maintain Add.

Following a weak 2Q15, OEL’s 3Q15 revenue continued to suffer from soft student enrolment numbers, especially in junior schools, resulting in 5.2% yoy and 6.4% qoq fall in revenue. Registration fees revenue fell from S$0.36m to S$0.24m in 3Q15.
On a 9- month basis, this translates into approximately 545 new registrations, vs. 695 a year ago, which was not able to offset the number of student withdrawals.

While 3Q15 operating expenses were higher by 17.1% yoy, due to the slight increase in staff costs (+5.8% yoy) and extensive depreciation charges (+205% yoy), 9M15 operating expenses trailed our FY15 estimate at 68%.
The increase in operating expenses is not as steep despite the new Pasir Ris campus being 4x the size of the old school at Paterson Road as facilities are still new and under warranty.

Besides the subdued macroeconomic outlook, foreign system schools like OEL not only face competition within Singapore, but also from international schools across the Causeway such as Marlborough College and Excelsior International. A 9-Oct-15 news article identified lower school fees (esp. a favourable RM/S$), more affordable cost of living and larger facilities as factors that have led parents to their choice of education for their children. We believe these will pose headwinds in the long term.

To account for the challenging outlook, we trim our assumptions for enrolment numbers from c.3,000 to 2,900 for FY15 (to grow at 5% pa thereafter) and annual school fee hike (from 5%/6% in FY16/17 to 1%/4% respectively).
In tandem with our revised student numbers and school fees, we also lower our numbers for personnel expenses to reflect the prudent approach that OEL adopts in managing its cost structure.
Our FY15-17 EPS falls by 17-39% as a result.

Our new DCF-based target price of S$0.74 (WACC: 8%) implies 16x FY17 P/E. OEL has declared an FY15 special DPS of 1.4 Scts to celebrate 24 successful years and the transition to the new school.
Our base case payout ratio is 50%.
Key risks are the ability to grow its student enrolment and higher-than-expected rise in staff costs.
Maintain Add.

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | http://research.itradecimb.com/ 2015-11-16

CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.74 Down 0.97