Overseas Education Limited (OEL) - CGS-CIMB Research 2020-09-02: Students Not Coming In; Downgrade To HOLD


Overseas Education Limited (OEL) - Students Not Coming In; Downgrade To HOLD

  • We expect Overseas Education Limited (OEL)’s student enrolment to decline to 2,400 in AY20/21 and 2,300 in AY21/22 on job market weakness and recent restrictions on foreign hiring.
  • While 1H20 core net profit rose 51.2% y-o-y due to lower opex, we project a weaker 2HF on lower topline, mitigated by some savings in personnel costs.
  • Downgrade OEL to HOLD with S$0.26 Target Price and c.10% yield. We think the lacklustre earnings outlook is priced in at 16x FY21F P/E (1 s.d. below historical mean).

Expect lower enrolment numbers for AY20/21 and AY21/22

  • Singapore’s unemployment rate spiked to 2.9% in 2Q20 with retrenchments doubling q-o-q to 6,700. The soft labour market, coupled with recent tightening of foreign work pass policies and border restrictions, is likely to make it tougher for new expats to enter Singapore, and convert earlier enquiries into enrolment at Overseas Education Limited (OEL, SGX:RQ1).
  • Other international schools like Singapore American School and Global Indian International also reported a slowdown in physical enrolment with more severe impact expected in 2021 (source: The Business Times). According to relocation specialist SIRVA, relocation inquiries to Singapore fell 23% y-o-y in 7M20.

OEL's 2H20F projected to be weaker

  • OEL reported 1H20 core net profit of S$5.6m, deemed in line at 65%/66% of our/consensus full-year forecasts as we expect a weaker 2H20F. While 1H20 topline was flat at S$41.3m, the 51.2% y-o-y net profit growth came from lower finance cost (bank loan was refinanced in April 19 at 3.3% p.a. instead of 5.2%) and other operating expenses due to reduced level of activities during the circuit breaker period.
  • With 200 students graduating in AY19/20 and the likely shrinking local expat community, we forecast enrolment numbers to decline from c.2,500 in AY19/20 to 2,400 in AY20/21 and 2,300 in AY21/22.

Downgrade OEL to HOLD with a lower Target Price of S$0.26

  • We lower our OEL's FY20-22F EPS forecasts by 2.3-20.9% to reflect weaker student enrolment numbers and unchanged annual tuition fees, partially offset by lower personnel costs (keeping to its ideal teacher-to-student ratio of 1:10). We downgrade OEL to HOLD from Add, with a lower S$0.26 Target Price which is based on 15x FY21F P/E (1 s.d. below its 4-year historical mean; previous: 19.5x).
  • At the current valuation of 16x forward P/E (1 s.d. below its historical mean), we think the near-term lacklustre earnings outlook has been largely priced in.
  • Catalysts: potential privatisation (given that it is 65% controlled by two significant shareholders) and faster lifting of travel restrictions.
  • Risks: unexpected dividend cuts, stricter hiring practices for foreigners and rising competition.

HOLD for c.10% dividend yield

NGOH Yi Sin CGS-CIMB Research | Caleb PANG Huan Zhong CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-02
SGX Stock Analyst Report HOLD DOWNGRADE ADD 0.26 DOWN 0.420