Overseas Education Ltd - CIMB Research 2016-02-17: Riding through tough times

Overseas Education Ltd - CIMB Research 2016-02-17: Riding through tough times OVERSEAS EDUCATION LIMITED RQ1.SI 

Overseas Education Ltd - Riding through tough times 

  • OEL’s FY15 core net profit of S$14.9m was slightly above at 106% of our forecast due to lower depreciation, but in line with consensus at 101%. 
  • FY15 core net profit declined 32.1% yoy, driven by soft student enrolment and higher operating costs upon the move to the new campus. 
  • With monitored supply of foreign system schools (FSS) and the soft macroeconomic outlook, we expect enrolment numbers to stay flattish in the near term. 
  • OEL kept DPS of 2.75 Scts for FY15. We maintain Add with a lower TP of S$0.62. 

■ FY15 revenue slumped 4.9% yoy 

  • OEL reported a 4.9% yoy drop in FY15 revenue of S$97m, which formed 102% of our full-year estimate. This was largely due to 4.1% yoy lower tuition fees as OEL suffered from weaker student enrolment numbers despite school fees’ hike of 10% on average. 
  • FY15 registration fees were S$1.4m vs. S$1.8m in FY14, translating into c.200 fewer new registrations on a full-year basis. 

■ Operating costs: new school, new norm 

  • OEL’s relocation to a new, bigger campus in Jul 15 resulted in a 5.4% yoy increase in operating expenses. 
  • Depreciation surged 112% and utilities expenses climbed 43.3% yoy, and are expected to become the new norm for the school. 
  • Personnel expenses, which formed over 50% of cost structure, edged up by 0.3% in FY15 even after an annual salary adjustment, as management sought to manage staff strength in proportion to enrolment numbers (about 1:10). 

■ Limited places in local schools 

  • According to the Straits Times, the authorities continue to monitor the education landscape in Singapore. 
  • Its recent award of a new FSS site to Nexus International School in Nov 15 indicates underlying demand from expat parents, as they struggle to find places in local schools, partly due to the government’s policy of “Singaporeans-first” for admission. 

■ Enrolment numbers expected to stay range-bound in the near term 

  • As of 31 Dec 15, OEL has an estimated student population of 2,800 vs. about 3,200 in the prior academic year. 
  • The steep fall in student numbers over the past two years, while not entirely expected, was similarly observed during the Asian financial crisis, according to management. 
  • With its diversified curriculum offerings, newer and bigger facility, international students may return to OEL in the mid-to-long term when the economic outlook improves. 

■ Maintain Add rating 

  • As we raise our FY16 EPS estimate by 13% and cut FY17 EPS by 6%, due to higher school fee hike in FY16 but lower in FY17), our DCF-based target price falls to S$0.62 (WACC: 8%). 
  • OEL kept its DPS of 2.75 Scts for FY15, which translates into a payout ratio of 76.5% and dividend yield of 5.6%. 
  • Maintain Add.

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | http://research.itradecimb.com/ 2016-02-17
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 0.62 Down 0.74