Overseas Education - DBS Research 2016-05-11: Disappointing 1Q16 results

OVERSEAS EDUCATION LIMITED RQ1.SI

Overseas Education - Disappointing 1Q16 results

1Q16 results below expectations, hit by higher expenses and deferred tax
Cut FY16-17F earnings by half after imputing higher expenses and deferred taxation
Ceasing coverage of the stock; TP cut to S$0.40

1Q16 revenue of S$23.7m (-3.5% y-o-y) accounted for 24% of our full year forecast. However, net profit dived 76% y-o-y, hit by higher expenses and deferred tax.
The 3.5% drop in revenue was mainly due to the lower student enrolments in the junior schools after the move to the new school campus in July 2015.
The increase in operating expenses was attributable to higher depreciation expenses, finance costs, utilities and the revision of property tax for the new school campus with effect from the issuance of the Temporary Occupancy Permit.
The accrual of net deferred tax liabilities of $1m due to the recognition of capital allowances on new assets acquired for the new school campus made a further hit on the bottomline.

FY16-17F earnings cut by half after imputing higher expenses and accounting for deferred taxation. FY16F earnings is expected to plunge by 62% to S$5.6m (vs S$14.9m in FY15) as the full impact of depreciation for the new campus and interest costs for the bonds are recognised. Expenses for FY17F are likely to stabilise; thus earnings are expected to improve slightly to S$7.1m.
The enrolment forecasts for FY16 and FY17 are maintained at 3,000, representing c.63% of total capacity of 4,800 students for the new campus. This number is similar to FY15 but 17% lower than FY14’s enrolment of about 3,600 students.
In line with the cut in earnings, the TP is cut to S$0.40 from S$0.56.
On the back of uncertain company outlook and weak earnings, we will be ceasing coverage of the stock after this report.

LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2016-05-11

DBS Vickers SGX Stock Analyst Report CEASE Maintain HOLD 0.40 Down 0.56