MindChamps Preschool - RHB Invest 2018-08-21: Expect A Stronger 2H

MindChamps Preschool - RHB Securities Research 2018-08-21: Expect A Stronger 2h MINDCHAMPS PRESCHOOL LIMITED SGX:CNE

MindChamps Preschool - Expect A Stronger 2h

  • Maintain BUY, new Target Price of SGD0.94 from SGD1.00 offers 34% upside. Our Target Price and call are mainly due to a lower sector valuation.
  • Although the 1H contribution was soft vs our full-year estimate, we believe this was due to seasonal factors. Also, MindChamps incurred additional administrative costs to run the Australian preschools acquired in end-2017.
  • Moving into 2H, we expect enrolment numbers to pick up, leading to faster revenue growth and better operating leverage. The six newly-acquired Australian preschools this year should also contribute positively to 2H numbers.

More visibility in 2H.

  • We believe MindChamps Preschool’s soft 1H18 results were largely due to seasonal factors, as student enrolment numbers were lowest in 1Q after the previous year’s graduation. However, this should ramp up across 2H. In addition, its administrative costs at the headquarters level have increased to support its overseas expansion plan.
  • However, we remain positive on 2H’s outlook, as the growth in administrative cost should taper off after the initial set-up stage of its overseas schools. 
  • Rising student enrolment numbers will also improve revenue and operating leverage. As evidenced by its 2Q18 results, q-o-q revenue growth has caught up with the sequential increase in administrative costs. We expect this trend to continue into 2H18, and margins to improve.

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Australia preschools a key earnings driver in the near term.

  • MindChamps acquired another four preschools (a second batch) in Sydney, Australia in Jun-Jul 2018. The first four preschools (first batch) acquired in Nov 2017 contributed approximately SGD1m to total EBITDA in 1H. We expect the second batch to contribute EBITDA of a similar level as the first batch of preschools.
  • MindChamps has another two Australian preschools (ie a third batch) targeted for acquisition as well – and the deal is expected to be completed by year-end. This will bring its total preschools in Australia to 10 by the end of 2018.

China expansion.

  • Management expects to begin acquiring preschools in China, through the China Preschool Fund, this November – marking a slight delay from its previous guidance of August. Nevertheless, we have not factored in any royalty income from the acquisitions of China franchisees.
  • The sale of the first batch of 30 franchise licenses to its master franchisee in China, however, is likely to bring a strong one-off franchise income to the group.

Maintain BUY, with Target Price of SGD0.94.

  • We lower our FY18-20F earnings by 3- 6% on the softer-than-expected 1H results. We also trim our target EV/EBITDA multiple to 18x from 19x due to a lower sector valuation. This lowers our Target Price to SGD0.94, based on a blended valuation between 18x EV/EBITDA and its DCF.
  • However, we are still positive that 2H results should show wider margins, stemming from higher revenue growth and better operating leverage.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-08-21
SGX Stock Analyst Report BUY Maintain BUY 0.94 Down 1.000