Overseas Education Limited - RHB Invest 2016-02-18: Let’s Take a Gap Year

Overseas Education Limited - RHB Invest 2016-02-18:  Let’s Take a Gap Year OVERSEAS EDUCATION LIMITED RQ1.SI 

Overseas Education Limited - Let’s Take a Gap Year 

  • We maintain our SELL recommendation on OEL and lower our DCF-derived TP to SGD0.36 (from SGD0.51, 26% downside) to reflect a difficult operating environment. 
  • While student withdrawals from the relocation of its Orchard campus to Pasir Ris have stabilised, we think the repatriation of foreign workers would continue to rise in this weak macroeconomic environment. 
  • Thus, we expect dwindling foreign student numbers in 2016, affecting the entire foreign system school (FSS) industry. 

Returning expats – a double whammy for Overseas Education Ltd (OEL). 

  • We remain bearish on FSS this year as we expect to see continued downsizing of firms in the expat-concentrated industries like finance and oil & gas in Singapore. 
  • On the back of the challenging macroeconomic outlook, we note that the repatriation of expats could also be due to companies not doing well in their home countries. Therefore, OEL could be affected by: 
    1. the repatriation of existing students, and 
    2. negative growth in foreign student pool. 

Lower retention rate of junior school students poses higher risk. 

  • Currently, 36% of OEL’s students are in high school. As such, we think that new enrollments may not be able to offset the number of graduating students at the academic yearend. 
  • We change our assumptions and forecast student numbers to drop by 4.5% in FY16. 

Maintain SELL with lower SGD0.36 TP. 

  • We cut FY16F and FY17F earnings by 39% to reflect the difficult operating environment. This lowers our DCF-derived TP to SGD0.36 (Figure 1 for DCF assumptions). 
  • At the moment, we do not see any near-term catalyst for the FSS industry to turn around.

Juliana Cai RHB Research | http://www.rhbinvest.com.sg/ 2016-02-18
RHB Research SGX Stock Analyst Report SELL MAINTAIN SELL 0.36 Down 0.51