We initiate coverage on Overseas Education (OEL) with a BUY recommendation and a DCF-based target price of S$0.88, implying a 21.4% upside from the current price. OEL is one of four Singapore-listed education service providers and is the investment holding company of Overseas Family School (OFS), the third-largest foreign system school (FSS) in the country. Backed by a 20-year history, OFS continues to benefit from resilient demand for quality education asSingapore’s foreign talent population grows. It is set to increase its capacity by 22% with the potential opening of a new campus in 2015. With strong cash flow and balance sheet, we expect OEL to be able to retain its net cash position throughout the construction of its new campus.
New site to increase capacity and improve pricing.Operating at 96% utilisation, OFS has plans to open a new campus in Pasir Ris, which would increase its capacity from 3,940 students to at least 4,800. The school expects to raise enrolment numbers and tuition fees, which are still 15-25% below competitors’, once it moves to its new site. Assuming the new campus opens in 2015, we forecast OEL’s net profit to register a CAGR of 11.5% over 2015-18 (vs a CAGR of 6.3% over 2012-15).
Demand to remain resilient, driven by growth in foreign talent. The government’s pursuit for economic growth will continue to support the demand for foreign talent in Singapore. We expect the government to facilitate the development of educational infrastructures as FSSs play a key role in attracting foreign direct investments (FDI) into the country. Parents who are Permanent Residents (PR) and P1 Employment Pass holders are the key target markets of FSSs and, in our view, they are less impacted by the recent policies on foreign workers. We expect higher-income foreigners to continue to relocate to the country for employment and they are more likely to bring their families with them and seek out schools with globally-recognised curriculums.
Strong operating cash flow and balance sheet to support expansion plans. We project OEL to generate operating cash flows of about S$30m p.a. in 2013-15 and its cash position to rise 24% this year to reach S$117m. It currently holds no debt. While cash levels will decline following the school’s acquisition of new land and as construction of the new campus progresses, we expect OEL to be able to retain its net cash position. Based on our capex estimates, we believe OEL will require about S$50m in debt financing in 2015. Post-construction of the new school, we estimate steady-state free cash flow (FCF) yields of more than 10%.
Key risks include a) unsuccessful bid for the Pasir Ris site and inability to extend its current leases, b) regulatory risks in the private education sector and on foreign talent and immigration, c) negative external shocks that could hurt Singapore’s economy and expatriate population, d) decline in school enrolment due to change in site, and e) rise in personnel costs.
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