Overseas Education Ltd - CIMB Research 2016-05-13: Awaiting better visibility for enrolment

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OVERSEAS EDUCATION LIMITED RQ1.SI 

Overseas Education Ltd - Awaiting better visibility for enrolment 

• 1Q16 net profit below at 11% of our full-year estimate. 
• The main reasons were 
  1. lower revenue from weaker student enrolment, 
  2. higher operating costs and 
  3. distortion by deferred tax liabilities. 
• We fine-tune our FY16-18 assumptions for enrolment numbers, tuition fees, staff numbers and salary adjustment, hence our FY16-18 EPS fell by 4.0-13.3%. 
• Our DCF-derived target price is lower at S$0.42 (WACC: 8%), and we downgrade to Hold from Add. The stock offers an FY16-18F dividend yield of 4.9- 6.8%. 

1Q16 net profit below at 11% of full-year estimates 

• OEL’s 1Q16 net profit of S$1.3m (US$1m) missed consensus/our full-year estimates of S$10m/S$12m due to the following reasons: 
  1. revenue of S$23.7m was slightly below our expectation at 24%; 
  2. total operating expenses were higher than our forecasted S$72m for FY16 and 
  3. distortion of effective tax rate (1Q16: 43.1% vs. 1Q15: 16.5%) due to the accrual of net deferred tax liabilities from recognition of capital allowances. 

A function of tuition fees and staff costs 

• OEL’s business model is relatively straightforward: core revenue contribution comes from tuition fees which represent 95-97% of its total income, while its new cost structure consists of personnel expenses (55-60%), depreciation expenses for the new campus (~10%) and finance costs from the S$150m bond (~10%). 
• The key variable is enrolment numbers, which could affect its pricing power for tuition fees amongst others, as well as the number of teaching staff which is typically pegged to an ideal 1:10 ratio. 

1Q16 revenue down 3.5% yoy, operating expenses up 19.7% 

• As seen in earlier quarters, 1Q16 topline declined by 3.5% yoy (and 0.9% qoq) due to weaker student enrolment and operating costs edged up 19.7% because of higher depreciation expenses, utility charges and finance costs, which have become the new norm since OEL’s relocation. 
• Other operating expenses also went up 68.4% yoy in 1Q16 due to the revision of property tax for the new school building. 

Lower assumptions to reflect the uncertain outlook 

• In view of the softness in the global economic climate and retrenchment in MNCs across different sectors, we revise our following projections: 
  1. student numbers to stay flat in FY16 before growing by 1%/3% in FY17/18; 
  2. FY16-17 tuition fees to remain constant and grow by 2% in FY18; 
  3. staff numbers to fall by 6-9.5% over FY16-17 before growing by 1% in FY18 as the school adjusts its teacher-to-student ratio from 1:8 to 1:10 and 
  4. average personnel salary to increase by 3-7% over FY16-18. 

Reduce target price to S$0.42 and downgrade to Hold 

• Changes in our assumptions led to an FY16-18 EPS decrease of 4-13%, hence our DCF-based target price falls to S$0.42 (WACC: 8%). 
• We also downgrade from Add to Hold given the limited upside and lack of catalyst. 
• Initiatives by the school (such as new language classes, mandatory chess program) will take time to draw the students back to school. 
• We also trim our FY16-18F DPS to reflect the weak earnings outlook, translating into a lower dividend yield of 4.9-6.8%.

William TNG CFA CIMB Securities | NGOH Yi Sin CIMB Securities | http://research.itradecimb.com/ 2016-05-13

CIMB Securities SGX Stock Analyst Report HOLD Downgrade ADD 0.42 Down 0.62