Overseas Education Limited - UOB Kay Hian 2020-02-18: 2019 Slightly Ahead Of Expectations; Stabilisation Of Student Enrolments

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

Overseas Education Limited - 2019 Slightly Ahead Of Expectations; Stabilisation Of Student Enrolments

  • Overseas Education Limited's 4Q19 net profit of S$2.3m (+24.0% y-o-y) was slightly ahead of our expectations, with 2019 net profit forming 104% of our full-year estimate. Earnings growth was largely driven by margin expansion due to lower finance cost. Tuition fees rose 2.0% y-o-y in 4Q19, an improvement from a decline of 3.9% y-o-y in 4Q18, signalling a stabilisation in student enrolments.
  • Maintain BUY with a higher EV/EBITDA-based target price of S$0.49 as we roll valuation to 2020.



2019 RESULTS


4Q19 results slightly ahead of expectations.

  • Overseas Education Limited (SGX:RQ1)’s 4Q19 net profit of S$2.3m (+24.0% y-o-y) was a small beat, with 2019 net profit of S$8.0m forming 104% of our full-year estimate. Net profit rose 15.9% y-o-y in 2019, largely attributable to the 1.4ppt expansion in net profit margin.

Margin expansion from loan refinancing.

  • Similar to the last quarter, net profit margin rose 2.0 ppt to 11.3% in 4Q19 from 9.3% in 4Q18, mainly due to cost savings from lower finance cost as (finance cost – 4Q19: S$1.6m, 4Q18: S$0.4m). The interest rate for the new bank loan is significantly lower at 3.4-3.7% compared to the 5.2% annual interest rate of the fully redeemed bond.
  • For 2019, finance cost declined 29.2% y-o-y. With the refinanced loan, debt level will continue to fall over time, thus lowering finance cost on a y-o-y basis.

Narrower rate of decline in tuition fees.

  • In terms of student enrolments, we see shreds of positive developments as the decline in tuition fees has been narrowing (2019: -0.9%, 2018: -4.4%). To recap, the tuition fees collected saw positive y-o-y growth for the first time in 3Q19.
  • A similar trend was seen for 4Q19 with tuition fees increasing 2.0% y-o-y, signalling a potential stabilisation in student enrolments.

Maintained dividend at 2.75 S cents/share.

  • We note that Overseas Education Limited has consistently made annual dividend payment of 2.75 S 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. This translates to an attractive dividend yield of 7.5%.


STOCK IMPACT

  • Management expects the current operating environment for foreign system schools (FSS) to remain challenging and competitive over the next 12 months. That said, should there be a rise in expatriates (with school going children) relocating to Singapore, we believe OFS could stand to benefit as it is able to accommodate many new students.
  • Overseas Family School’s (OFS) 100,000-sqm campus has a capacity for 4,800 students, which is well over the present student count of about approximately 2,500.

Expect improvement over time from paring down of debt and 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.


EARNINGS REVISION/RISK

  • We maintain our earnings estimates and introduce our 2021 earnings forecast of S$9.1m.
  • Risk include 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



SHARE PRICE CATALYST

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





John Cheong UOB Kay Hian Research | Joohijit Kaur UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-18
SGX Stock Analyst Report BUY MAINTAIN BUY 0.49 UP 0.460



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