Overseas Education Ltd - CIMB Research 2016-11-09: Temporarily trumped by lower student enrolment

OVERSEAS EDUCATION LIMITED RQ1.SI

Overseas Education Ltd - Temporarily trumped by lower student enrolment

Cost-savings from reduced staff strength unable to offset falling revenue from student withdrawals; 9M16 core net profit below expectations at 36% of our FY16F.
Potential recovery in student enrolment; lower personnel costs more visible in FY17F.
OEL declared interim DPS of 0.69 Scts. No change to our dividend forecasts -- we still see 4.8-6.0% dividend yield for FY16F-18F.

Hold rating kept with unchanged DCF-derived target price of S$0.42 (WACC: 8%) as we roll our valuation over to end-FY17F.

Enrolment for the new academic semester in Aug 16 at OEL failed to keep up with student withdrawals, resulting in 7.4%/4.4% yoy decline in 3M/9M16 revenue.
Management attributed the student withdrawals to the increasing relocation of expat families from Singapore. Student numbers could improve gradually from FY17F as management observed more registrations for the new semester in Jan 17, assuming student outflow tapers off.

We saw 3Q16 personnel expenses come down 5.4% yoy, as some staff contracts were not renewed due to the reduced size of student population.
We expect more visible effects of such cost savings starting FY17F, as the school continues to manage its staff strength to align with the ideal teacher-to-student ratio of 1:10.
Overall, 9M16 core net profit trailed expectations at 36% of our full-year forecast.

Apart from being one of the top few destinations for expat families, Singapore was recently ranked the 10th most attractive nation in the world for foreign direct investment, according to A.T. Kearney’s FDI Confidence Index.
Management believes OEL is well poised to benefit from any expansion of foreign investment into Singapore, given its new campus and quality of school programmes.

OEL’s prudent approach towards capital management was reflected in its lower interim dividend of 0.69 Scts in 3Q16 (vs. 1.38 Scts in 3Q15).
Given its cash-generative business, we maintain our forecasted 2 Scts DPS for FY16F, implying dividend yield of 4.8%.
A stronger earnings outlook could support higher dividends, in our view.

We trim our assumptions for tuition fees and personnel costs, which led to 49-58% cuts in FY16F-18F EPS estimates.
Our DCF-based target price is intact at S$0.42 (WACC: 8%) as we roll our valuation over to end-FY17F.
We maintain our Hold call as we see no near-term catalysts. Our projected double-digit EPS growth in FY17-18F is largely due to lower staff costs and normalising of high effective tax rate from deferred tax liabilities.
Changes in student enrolment numbers are key upside/downside risk to our call.

NGOH Yi Sin CIMB Research | William TNG CFA CIMB Research | http://research.itradecimb.com/ 2016-11-09

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