MindChamps Preschool - RHB Invest 2018-05-09: Ramping Up For Growth

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MINDCHAMPS PRESCHOOL LIMITED SGX: CNE

MindChamps Preschool - Ramping Up For Growth

• MindChamps’ 1Q18 results came in below our estimates. This was due to the seasonal effect on preschools and higher operating costs that stemmed from an increase in its number of centres and staff to support the group’s overseas expansion.
• We expect revenue and earnings to catch up over the next three quarters – as its student count increases, and the Woodlands MindChamps Preschool and four new Australia preschools’ accounts are consolidated into the group’s numbers.
• Maintain BUY, with an unchanged Target Price of SGD1.00 offering an upside of 25%.

Lower operating leverage in 1Q18.

• MindChamps Preschool Limited's 1Q18 revenue rose by 36% y-o-y, due to the consolidation of its four Australia preschools that were acquired in Nov 2017. However, MindChamps Preschool (MindChamps) felt the impact of seasonal changes that affected student enrolment numbers. 
• Typically, the first quarter records a lower number of students, due to the graduation of K2 students (ie kindergarten level) at year-end. As such, the quarter features narrower margins, as its operating leverage decreases. This is exacerbated by the increase in administrative costs incurred by the new centres, as well as the higher headcount taken to support the group’s business expansion overseas.

Increase in administrative costs to taper down.

• We understand from management that the bulk of the increase in staff for corporate functions was done in 1Q18. We expect the increase in administrative costs to taper down q-o-q. 
• Administrative costs as a percentage of revenue should also decline as its student count and school fees increase over the next three quarters.

New acquisitions to contribute positively.

• The acquisitions made in 1H18, ie Woodlands MindChamps Preschool and the four preschools in Sydney, should also have a positive impact on group earnings upon their consolidation in the group’s accounts.

Look forward to August!

• The group has plans to launch its preschools in China in August. If this materialises, we believe it would lead to a further upswing in its earnings. 
• Maintain BUY, with a Target Price of SGD1.00 based on a blended valuation methodology that comprises 19x FY18F EV/EBITDA and DCF.

Juliana Cai CFA RHB Invest | https://www.rhbinvest.com.sg/ 2018-05-09

SGX Stock Analyst Report BUY Maintain BUY 1.000 Same 1.000