Overseas Education Limited - CGS-CIMB Research 2019-12-03: Investing In Education With c.9% Yield


Overseas Education Limited - Investing In Education With c.9% Yield

  • Overseas Education Limited (OEL) offers rare exposure to Singapore international education and attractive 8.7% dividend yield, with over S$20m free cash flow (FCF) from FY17-21F.
  • Steady net profit growth of c.10% in the next two years with the shift towards higher-fee students mix (senior school) and stringent cost control.
  • OEL trades at -1 s.d. below 4-year mean P/E of 22.5x.
  • Catalysts: M&As and expat growth into Singapore.
  • Initiate coverage with ADD.


K-12 educator

  • OVERSEAS EDUCATION LIMITED (OEL, SGX:RQ1) operates Overseas Family School (OFS), a leading single-campus international private foreign system school (FSS). The school was founded in 1991 by Executive Chairman and CEO David Alan Perry, and Executive Director Irene Wong.
  • As of FY18, the school has an operating history of more than 25 years, with an estimated enrolment of about 2,500 students of over 60 nationalities, supported by c.400 staff members.

Move out of Central Orchard

  • Overseas Education Limited (OEL) was listed on the Singapore Exchange (SGX) mainboard at S$0.48 per share in Feb 2013, raising S$72m of funds in total. See See Overseas Education Limited Share Price History. Apart from its net IPO proceeds, the group used an additional S$60m from distributable profits and issued S$150m worth of five-year bonds to finance the construction of its new campus in Pasir Ris.
  • OEL had to vacate its original campus site (25F Paterson Road, a prime location in Central Orchard) in Jun 2015 due to the expiration of the land lease. Its current campus is located in the east of Singapore, at 81 Pasir Ris Heights, on a bigger land area of 110,000 square metres, with an approved student capacity of 4,800, which is 1.2x that of its previous campus (which had a maximum approved capacity of 3,940 students).
  • We think the new campus offers students a better learning environment — it is equipped with modern facilities, such as technology, science and computer labs, an auditorium with state-of-the-art multimedia facilities, LED lighting, sport fields, an Olympic-sized swimming pool, and a black box theatre. To date, OEL is the only SGX-listed international school.

Dust has settled; expect revenue and enrolment to stabilise

  • We think the dust has finally settled for OEL, post its 2015 relocation from a prime city-centre location to a new, bigger campus in the east, as its revenue and student enrolment numbers (c.2,500 as at Aug 2019) stabilise.

Stronger recruitment, faster debt repayment lead to higher growth

  • Despite consecutive years of declining revenue due to steep student withdrawals since FY14, OEL saw its net profit recover from S$5.3m in FY16 to S$6.9m in FY18, thanks to cost-management initiatives to streamline its workforce (by c.20%) and pare down its debt.
  • We expect the more stable student enrolment growth and cheaper debt refinancing in FY19F (reduced by 170 basis points) to underpin our FY19-21F net profit CAGR of 8.9%.
  • Further upside to our FY19-21F EPS forecasts could come from faster loan repayments and higher student enrolment, in our view.

Top 10 non-REIT dividend-paying stocks in Singapore at 8.7% yield

  • OEL has an established track record of paying 2.75Scts dividend per share since its listing in 2013, implying a c.9% yield and a payout ratio of more than 100% (exceeding its dividend policy of paying out at least 50% of net profit). See Overseas Education Limited Dividend History. With c.S$70m in revenue reserves (as of end-FY18), minimal capex needs, and our projected FCF of c.S$25m p.a., we believe OEL can maintain its S$11.4m dividend payouts for FY19-21F.
  • We also forecast OEL’s net gearing position to improve from 53.2% in FY18 to 37.7% in FY21F.

Initiate with ADD rating (42% total return potential)

  • We like OEL for its prudent management, attractive dividend yield and steady earnings growth. Our ADD rating and Target Price is based on 19.5x FY21F P/E, which is at -0.5 s.d. of its 4- year mean. See Overseas Education Limited Target Price.
  • See attached 28-page PDF report for detailed analysis on OEL's business model, competitive strengths, industry overview and financials and valuation details.
  • OEL currently trades at 0.9x FY19F P/BV and 14.7x FY21F P/E, which is more than 1 s.d. below its historical mean. On an EV/EBITDA basis, OEL’s FY20F trading valuation is 25% below the regional industry average of 8.6x. Apart from the historical low valuation, both the founders (Mr. David Perry and Ms. Irene Wong) own a combined stake of 64.8% (as of end Nov 2019).
  • We have seen a slew of privatisations and M&A within Singapore’s small cap space in 2019, for instance, Memtech International (57.8% owned by founding family and management, last traded at below book and earnings valuation trough) and Health Management International (SGX:588) (61.8% stake already held by founding family and concerted parties, with P/E valuation at a discount relative to regional peers and affected by gestation costs). OEL has the same characteristics – simple shareholding structure, less favourable near-term industry outlook and historical low valuations.
  • We believe a faster recovery of enrolment numbers could re-rate the stock.
  • Unfavourable policy changes, increasing competition from more international and budget schools, as well as a deteriorating macro outlook could pose downside risks to our ADD rating.

NGOH Yi Sin CGS-CIMB Research | Caleb PANG Huan Zhong CFA CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-03
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