OVERSEAS EDUCATION LIMITED (SGX:RQ1)
Overseas Education Limited (OEL) - 1Q19: Results In Line; Commendable Double-Digit Net Profit Growth
- Overseas Education Limited's 1Q19 net profit was in line with our expectation, meeting 28% of our full-year estimate and up 10% y-o-y due to a slower decline in revenue and continued efficient cost control.
- We expect a better performance from 2Q19 onwards as the significant cost savings from loan refinancing kick in.
- Maintain BUY and EV/EBITDA-based target price of S$0.46.
- Valuation is attractive at the current 7.8x 2019F EV/EBITDA and with a sustainable 9.2% dividend yield.
OEL's 1Q19 RESULTS
1Q19 results in line, good cost control and tapering decline in revenue.
- OVERSEAS EDUCATION LIMITED (SGX:RQ1)’s 1Q19 earnings were in line with our expectations, reporting 10% y-o-y growth.
- Revenue fell 3.4% y-o-y, due to a continued decline in student enrolments but the decline has narrowed compared to the 4.6% decline in 1Q18. In addition, total expenses fell 9% y-o-y mainly due to lower financing costs and personnel expenses.
- (See initiation report: Overseas Education Limited (OEL) - UOB Kay Hian 2019-04-22: An Education Gem Backed By A Sustainable 8.2% Yield)
Expect a better 2Q19 as significant cost savings from loan refinancing kicks in.
- We expect 2Q19 to perform better on significant cost savings of around S$3.3m from the refinancing of its borrowings and further reduction of operating costs. This might be offset by a revenue decline of S$2.6m.
- To recap, Overseas Education Limited has successfully refinanced its bonds of S$117.8m on 17 Apr 19 and this should contribute to one and half months of interest savings.
Expect improvement over time from paring down debt and a better brand name.
- Overseas Education Limited showed notable financial improvements from 2016 to 2018 in terms of EBIT margin and balance sheet strength. Given time, we believe the continued strengthening of its brand name in the new location will help to attract more students.
- On the other hand, with the refinanced loan, debt level will continue to fall over time and lead to a stronger balance sheet and potentially higher dividend.
STOCK IMPACT
Expect 11.2% net profit growth in 2019 on major cost savings and narrowing rate of decline in student numbers.
- In terms of student enrolment, we see shreds of positive development as the decline has been narrowing. Moreover, Overseas Family School (OFS) is able to accommodate many new students within their 100,000-sqm campus with a capacity for 4,800 students, which is well over the present student count of about 2,500.
- We expect net profit growth to be driven by the narrowing decline in revenue, as well as the reduction in operating costs which has outpaced the drop in revenue growth over the past two years. We expect this trend to continue with cost savings of about S$3.3m in 2019.
EARNINGS REVISION/RISK
- N.A.
VALUATION/RECOMMENDATION
Maintain BUY and target price of S$0.46
- We value Overseas Education Limited at S$0.46, based on 10.4x EV/EBITDA, a 15% discount to global peers’ 2019 average.
SHARE PRICE CATALYST
- Potential privatisation.
- Potential EPS-accretive or strategic acquisitions.
- Faster-than-expected ramp-up at two new plants.
John Cheong
UOB Kay Hian Research
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Joohijit Kaur
UOB Kay Hian
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https://research.uobkayhian.com/
2019-05-08
SGX Stock
Analyst Report
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