MindChamps Preschool - RHB Invest 2018-10-16: Overseas Expansion Continues


MindChamps Preschool - Overseas Expansion Continues

  • Maintain BUY with unchanged Target Price of SGD0.94, 54% upside. Our Target Price is based on a blended valuation methodology comprising a target EV/EBITDA of 18x (in line with peer average) and DCF.
  • MindChamps is continuing its expansion overseas as the Singapore market matures. YTD, it has acquired six centres in Sydney, bringing its total preschools in Australia to 10. MindChamps has also appointed a new master franchisee in Malaysia, which is expected to open 20 preschool centres by 2024.
  • Moving forward, we expect the group to commence the acquisition of preschools in China in Nov 2018, and open more preschools in Australia via the franchise model in 2019.

Grooming the Australian joeys.

  • YTD, MindChamps has acquired six centres in Sydney. This brings its total number of preschools in Australia to 10. As the six acquisitions were completed between June and September this year, the new centres are expected to contribute positively to 2H18 results.
  • With 10 company-owned, company-operated (COCO) schools located strategically in Sydney, we believe MindChamps will be able to build adequate brand awareness in the city. Moving forward, management guided that the group is ready to expand via the franchisee model.

One-off gain from sale of franchisee licence in Malaysia.

  • Last week, the group announced the appointment of Victoria Education as its master franchisee in Malaysia. The master franchisee is expected to open 20 MindChamps preschools by 2024, with the first of these schools to commence operations in Johor Bahru in 2019.
  • The sale of the 20 franchise licences will results in a one-off gain in 4Q18, which is in line with our full-year estimate.

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Raising the Chinese dragons.

  • Management expects to commence the acquisition of preschools in China through the China Preschool Fund in November. 
  • The group will be running two brands in China – the main brand, MindChamps, which will have the full set of MindChamps curriculum, and a sub-brand, Powered by MindChamps, which will have a normal curriculum plus enrichment courses by MindChamps.

Fund structure mitigates concerns on potential losses.

  • MindChamps has a 50:50 JV agreement with China First Capital Group (CFCG) to establish a China preschool fund, which targets to raise USD200m from the sale of limited partnerships (LP). MindChamps and CFCG each own 50% of the issued share capital of the general partner (GP).
  • MindChamps has a separate JV with CFCG (OpCo), where MindChamps owns 49% and CFCG owns 51%. The OpCo works as a MindChamps’ master franchisee in China.
  • The OpCo will pay licensing fees to MindChamps to operate multiple MindChamps preschools and operate as a master franchisee in China. Each preschool acquired by the China preschool fund will then pay licensing fees and recurring royalties (a percentage of revenue) to the OpCo and MindChamps.

Multiple income streams from this structure.

  • The group is assured of the income streams, including:
    1. One-off licensing fees from OpCo;
    2. Recurring royalties from each franchised preschool (portion paid to MindChamps);
    3. 49% of profits from the OpCo;
    4. 50% of management fees as the GP of the China preschool fund.
  • We believe these income streams would help to mitigate or offset risks of any potential losses from the operations of each franchised preschool in China, which will affect the returns of the China preschool fund.

Maintain BUY with unchanged Target Price of SGD0.94.

  • Our Target Price is based on a blended valuation methodology comprising a target EV/EBITDA of 18x, which is in line with the peer average, and DCF.
  • We are positive on its 2H18 results, as we are expecting higher earnings on stronger student enrolment, contributions from the Australia preschools, and one-off gains from the sale of franchise licences.
  • Over the longer term, we believe MindChamps’ ability to leverage on preschool funds to acquire franchisees allows the group to generate multiple income streams with a reduced need for capex.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-10-16
SGX Stock Analyst Report BUY MAINTAIN BUY 0.940 SAME 0.940