Overseas Education - DBS Research 2016-02-17: Stable Enrolment

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OVERSEAS EDUCATION LIMITED RQ1.SI 

Overseas Education - Stable Enrolment 

• FY15 results in line 
• 5% increase in operating costs; personnel expenses stable 
• Expect enrolment to remain stable in FY16; new campus to fetch higher tuition fees 
• FY16-17F earnings cut by 22%- 25% after imputing lower enrolment and higher costs 

Positive free cashflow from FY16F onwards 

• Overseas Education (OEL) presents a highly cash generative business, with operating cashflow growing at 22% CAGR over 2010-2015. 
• We expect free cashflow to turn positive from FY16F onwards, after registering three years of negative cashflow as a result of the new campus. 
• Near term, we expect enrolment to remain stable, compared to our previous assumption of growth, on the back of the slowdown in global economies. 

Enrolment to remain flat y-o-y 

• We cut our earlier FY16 enrolment forecast of 3,100 to 3,000, which is about 63% of total capacity of 4,800 students for the new campus. This number is similar to that of FY15 but 17% lower than FY14’s enrolment of about 3,600 students. 
• We now expect a gradual improvement in enrolment from FY17 onwards, instead of the previous assumption of an improvement in FY16. 
• From FY16 onwards, the full impact of depreciation for the new campus and interest costs for the bonds will set in. Thus, we expect earnings for the group to ease 25%, before picking up in FY17F. 

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 FY17 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$0.56 translates into 21x FY16F PE and 16x FY17F PE. 

Key Risks to Our View: 

• Drop in enrolment. Tuition fees forms the bulk of the revenue. A drop in enrolment will result in lower revenue. 
• Operational. A rise in personnel expenses and retention of teaching staff will affect margins and operation.

LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2016-02-17

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