Overseas Education Limited 2Q19 - UOB Kay Hian 2019-08-19: Results In Line; Expect A Better 2H19 On Cost Savings

OVERSEAS EDUCATION LIMITED (SGX:RQ1) | SGinvestors.io OVERSEAS EDUCATION LIMITED (SGX:RQ1)

Overseas Education Limited 2Q19 - Results In Line; Expect A Better 2H19 On Cost Savings

  • Overseas Education Limited (OEL)'s 2Q19 net profit of S$1.6m (-12% y-o-y) is in line with our expectations, with 1H19 net profit forming 48% of our full-year estimate. While OEL benefitted from lower interest cost on the new bank loan, the financing cost also included initial bank charges.
  • We expect 2H19 to be slightly better as more cost savings from the loan refinancing kick in.
  • Maintain BUY and EV/EBITDA-based target price of S$0.46.



2Q19 RESULTS


2Q19 results in line, decline in revenue tapering.

  • OVERSEAS EDUCATION LIMITED (OEL, SGX:RQ1)’s 1Q19 earnings were in line with our expectations, with 1H19 net profit forming 48% of our full-estimate. Core net profit fell 12.3% y-o-y in 2Q19, largely attributed to the 5.1% y-o-y increase in financing cost to S$1.9m and revenue decline of 3.7% y-o-y.
  • The decrease in revenue was due to a fall in student enrolment; however, the decline in revenue from tuition fees narrowed from 4.6% y-o-y in 2Q18 to 3.5% y-o-y in 2Q19.

Drag on bottom line due to initial bank charges; expect 2H19 to be slightly better as more cost savings from the loan refinancing kick in.

  • While OEL benefitted from lower interest cost on the new bank loan, the financing cost also included initial bank charges to procure the new loan to fully redeem the bonds in Apr 19.
  • We expect a better performance in 2H19 on significant cost savings of around of around S$3.3m from the refinancing of borrowings and further reduction in operating costs, offset by a revenue decline of S$2.6m for 2019.

Expect improvement over time from paring down of debt and better brand name.

  • OEL 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 attract more students.
  • On the other hand, with the refinanced loan, debt will continue to fall over time and lead to a stronger balance sheet and potentially higher dividend.


STOCK IMPACT


We forecast 11.2% net profit growth in 2019 on cost savings and narrower 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’s (OFS) 100,000sqm campus has 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 dropin revenue growth over the past two years. We expect this trend to continue with cost savings of about S$3.3m in 2019.

Attractive dividend yield at 9.8%.

  • OEL has consistently made annual dividend payment of 2.75 cents/share since 2013 with a dividend payout ratio of more than 100% since 2015 despite the fall in net profit after the campus relocation.
  • Cash generated from operating activities (adjusting for SFRS 16 impact) remains stable at S$2.7m in 2Q19 (2Q18: S$2.6m) and should sustain DPS of 2.75 cents/share. This translates to an attractive dividend yield of 9.8% for 2019.


EARNINGS REVISION/RISK

  • We maintain our earnings estimates.
  • Risk include:
    1. increased competition;
    2. regulatory risks pertaining to foreign talent; immigration and the private education sector; and
    3. slowdown in Singapore’s economy.


VALUATION/RECOMMENDATION

  • Maintain BUY and target price of S$0.46, based on 10.4x 2019F EV/EBITDA, a 14% discount to global peers’ 2019 average.


SHARE PRICE CATALYST

  • Higher-than-expected student enrolment.
  • More favourable regulatory environment pertaining to foreign talent.





John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-19
SGX Stock Analyst Report BUY MAINTAIN BUY 0.460 SAME 0.460



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