Overseas Education Ltd - CIMB Research 2016-08-10: More room for improvement

OVERSEAS EDUCATION LIMITED RQ1.SI

Overseas Education Ltd - More room for improvement

1H16 core net profit broadly in line at 33% as we expect better 2H16 from further cost-savings. Better clarity of student recruitment on rolling basis in 3Q16.
Competition among international schools heats up amidst a weak economic outlook.
Maintain Hold with unchanged estimates and DCF-based target price (S$0.42; WACC: 8%). The stock offers FY16-18F dividend yield of 4.6-6.3%.

Re-rating catalyst is strong return of student enrolment; downside risk is persistent economic weakness.

OEL saw slight yoy decline of 3.1% in 1H16 topline, attributed to lower student numbers in the junior school for the academic semester Jan-Jun 16. This was in line with our expectations at 50% as we have forecasted the current student population to remain in the range of 2,800 to 2,900 for FY16 since its campus relocation.
While 1H16 core net profit only formed 33% of our full-year numbers, we deem it in line as we expect further cost savings in 2H16 from reduced staff strength.

Besides Gems World Academy, other international schools such as Dulwich College and Tanglin Trust School have announced plans for capacity expansion. Maple Leaf Education also recently acquired a school property (S$68m) in Singapore, potentially becoming the first to offer BC (British Columbia) education in the medium term. These new and existing foreign system school (FSS) players have intensified competition for students, possibly making it difficult for OEL to grow its student population substantially.

While OEL continues to face student withdrawals as their families return to their home countries, management also observes fewer potential students who recently migrate from overseas.
On a positive note, the school has seen more student transfers from other international schools. Apart from an established reputation and track record, OEL’s edge also lies in its permanent campus.
Key headwind lies in weak economic climate.

OEL currently has an estimated student size of 2,650, with approximately 220 students having recently graduated.
As 3Q16 is typically the peak period of recruitment not only for OEL but also for other international schools, we expect greater clarity on new registrations then.
Staff costs should also edge downwards in 3Q16 as ~10% of teaching contracts has not been renewed.

We keep our forecasts unchanged and maintain a Hold rating on OEL as the stock offers a decent FY16-18F dividend yield of 4.6-6.3%, pending visibility of student numbers in 3Q16.
Downside risk to our Hold recommendation is persistent economic weakness, and potential catalyst could come from higher-than-expected student numbers.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-08-10

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 0.42 Same 0.420