MindChamps Preschool - RHB Invest 2020-03-02: Escalating Costs; Downgrade To NEUTRAL


MindChamps Preschool - Escalating Costs; Downgrade To NEUTRAL

  • MindChamps Preschool (SGX:CNE) delivered disappointing 4Q19 results. Excluding divestment gains, the group reported 4Q19 loss of SGD0.3m, despite 4Q being its seasonally strongest quarter. FY19 core PATMI tanked 89% to SGD0.7m.
  • Looking into FY20F, the group plans to acquire more preschools in Australia, and to set up its teachers’ academy and headquarters in Sydney.
  • In view of continued rising costs, we downgrade the stock to NEUTRAL.

Higher costs despite revenue growth.

  • FY19 revenue stood at SGD54m (+46% y-o-y). The strong growth was attributed to higher school fees and increased student enrolments following the acquisitions of preschools in 2018 and 2019. However, costs of running have increased much more starkly than revenue.
  • Cost of sales surged 81% y-o-y on higher number of academic and support staff, while administrative and marketing costs also grew c.50% y-o-y. This has resulted in poor earnings performance for FY19.
  • The lack of new master franchisees signed this year also contributed to lower income.

Takes time to build brand and student occupancy.

  • We were previously optimistic on the group’s venture into Australia as the higher average school fees would give the preschools higher margins than in Singapore. However, we note that MindChamps’ student occupancy in Australia is not yet at optimum levels.
  • As at end-2019, MindChamps’s Australian company-own, company-operate (COCO) preschools have an average of 58 students per school, while its Singapore COCO preschools have an average 103 students per school. As a result, margins for its Australian operations have remained subpar.

Lacklustre outlook for FY20F.

  • Management plans to acquire more preschools in Australia in 2020. The group would be targeting underperforming preschools, which they could acquire at lower prices and turn the school around in later years.
  • MindChamps also plans to build its headquarters in Sydney and set up a teachers’ academy. The teachers’ academy is expected to create a new stream of income by offering training for both internal and external preschool teachers. We are less optimistic on the outlook given the likelihood of further costs escalation amidst these expansion plans, as revenue could take a longer time to catch up.

Change in earnings and Target Price.

Juliana Cai CFA RHB Securities Research | https://www.rhbinvest.com.sg/ 2020-03-02
SGX Stock Analyst Report NEUTRAL DOWNGRADE BUY 0.37 DOWN 0.830