Overseas Education

UOBKayhian on 30 Jun 2015

FY15F PE (x): 15.1
FY16F PE (x): 11.5

Share price has risen 5% since our stock upgrade in March. We see further scope to increase our earnings forecasts and target price. Overseas Education (OEL) has received temporary occupation permit (TOP) from the Building and Construction Authority (BCA). It has also raised school fees for the new term starting Aug 15 by a significant 9.1-30%. Positive adjustment to earnings forecasts. Given the higher school fees, we increase our 2015 and 2016 net profit estimates by 5.4% and 2.3% to S$23.4m and S$30.8m respectively. Maintain BUY with a higher target price of S$1.02 to account for the higher-than expected increase in school fees. Our target price is based on a two-stage DCF valuation (cost of equity: 8%, terminal growth: 1%), which implies 18.0x 2015F PE. We believe investors would appreciate OEL’s sustainable business (30-year lease for the new building), strong cash flow generation (fees are collected before term starts) and inelastic client demand (parents are most likely to let their children go through the entire curriculum regardless of fee adjustment).

Overseas Education Ltd

Kim Eng on 30 June 2014

• International schools in Singapore still enjoy tight placements despite two new entrants - Dulwich and GEMS - this year.
• Maintain BUY with DCF-derived TP of SGD1.40.
• We think Dulwich and GEMS are drawing students from smaller schools. The larger schools are not affected.
• The international schools in Iskandar may only appeal to asmall segment given cost and travel constraints.

Tight supply despite two new entrants
Our checks reveal that the bigger international schools in Singapore still experience high demand. Admissions for the 2014/15 academic year are either full or have limited seats left. Supply of preschool seats is running particularly low. New entrant GEMS still has 900 seats available at its new school in Yishun (to open this August). The other new entrant Dulwich (500 seats), with a more convenient location in Bukit Batok, is filling up fast. With most of the smaller schools showing availability, we believe the new entrants could be drawing students from them and are not threatening the larger and more established schools such as Overseas Education Ltd (OEL).

Iskandar Malaysia not an option for everyone
The two most prominent international schools in the Iskandar region that Singapore-based parents can send their children to are Marlborough College and the upcoming Raffles American School (RAS). The all-in costs to attend Marlborough and RAS are equally if not more expensive than Singapore’s international schools. The travelling time that could consume up to two hours per day is hardly appealing. Students can board at the schools but that is only possible for ninth graders and above. In addition, RAS offers an American curriculum only, which only appeals to someone with
American universities in mind. Seri Omega is the other large international school in Johor and it has a predominantly Malaysian student base (90%), while the rest are small with 60-300 students.

OVERSEAS EDUCATION

UOBKayhian on 27 June 2014


VALUATION

• Maintain HOLD and target price of S$0.98, based on DCF model. The implied 2014F PE is 16x, vs peers’ average of 23x. We have adjusted our model to account for capitalised interest costs in 2Q14 until 1H15. Entry price is S$0.85.

INVESTMENT HIGHLIGHTS

• Tuition fees raised 6-10% for school year beginning Aug 14 and prekindergarten fees are raised by as much as 21%, based on our channel checks. We think this will mitigate the rise in personnel cost for fiscal year 2014 (1Q14: +6.9% yoy) mainly due to salary adjustments while growth in staff headcount is likely limited as student capacity utilisation is already maximised. Currently, Overseas Education’s (OEL) school fees are 17-30% below peers’ and we see room for the group to raise fees further.
• Financing costs to be capitalised initially until the new campus opens in 2H15. Thereafter, we estimate the group will recognise S$7.8m in annual interest expense for its 5.2% 5-year bond of S$150m issued in Apr 14. The fund-raising exercise keeps the development of the new campus on track and with this bond, we do not see the likelihood of an equity financing in the near term. The bond issuance translates into a net gearing of 33%, based on the group’s cash position as of end-Mar 14.
• Two new international schools to open in 2H14, namely GEMS World Academy in Yishun and Dulwich College (Singapore) in Bukit Batok. While it is too early to assess the potential impact from the increased competition, we reckon GEMS would pose a bigger threat to OEL, given the similarities in curriculum, educational thrust and size. Nonetheless, GEMS’ fees are 6-24% higher than OEL’s even with a 20% first-year discount, and 32-55% higher assuming regular fees. This supports our view that OEL remains very attractive in terms of pricing and has room for further hikes in tuition fees. 
• Demand growth will still outpace capacity growth in the medium term as Singapore’s economic and social attractions remain highly regarded. Frost & Sullivan estimates foreign student population will grow at an 8.1% CAGR from 2011- 12 to 2015-16, or a total of 15,547 students. On the other hand, planned capacity expansion is only estimated at 7,500 students over the next 3-4 years.
• Key risks for OEL this year include: a) higher personnel expenses, b) execution risk, and c) increased competition.

Overseas Education Ltd

Kim Eng on 26 June 2014

• Initiate with BUY and DCF-based TP of SGD1.40. Stock overhang eliminated post-bond issue, paving the way for further re-rating.
• Growth constraints a thing of the past with the new campus coming on-stream next August. EPS growth to accelerate to 15%/17% in FY15E/16E from 7% in FY14E.
• Catalysts: Higher-than-expected hikes in tuition fee and regional expansion. Risks: Competition and rising staff costs.

Entering into a strong growth trajectory
The successful raising of the final SGD150m cash to build its new SGD271m campus has eliminated the overhang on the stock which once faced severe growth constraints. With this issue now behind them, Overseas Education Ltd (OEL) – an international school operator - will embark on a stronger earnings growth trajectory of 16.1% over FY14E-16E (+13.6% CAGR in FY09-13). At 16x FY14E P/E, OEL is attractively priced vs sector peers’ 27.5x. Our DCF-based TP of SGD1.40 (5.5% WACC, 1% Tg) provides a strong 47% upside.

Why we like OEL
Deep-pocketed clientele. By targeting the children of high-income foreign professionals in Singapore, OEL commands strong pricing power at a time when demand still outstrips supply. Tighter immigration policies should not have any impact on its business.

Demand outpaces supply = pricing power.
As the new campus commences next August, we expect OEL to close the 15% gap between its tuition fees and competitors’. The competitive dynamics are expected to stay favourable: 8% pa demand growth for school places vs less than 4% pa supply growth until 2015/16. No more growth constraints. While growth in recent years was decent, it was hampered by space constraints at its old campus. This is set to change as the new campus increases its capacity by 22% and allows OEL to hike its tuition fees by 5.5% pa in FY15E-16E and 3-4% pa thereafter, based on our estimates.

OVERSEAS EDUCATION

UOBKayhian on 25 Feb 2014


VALUATION

• Maintain BUY with a higher target price of S$0.98 (previously S$0.94) as we roll over our valuations. Our 3-stage DCF model assumes a stage 2 growth rate of 1.5% which we think sufficiently factors in the risk of a slower ramp-up at its new campus. The implied 2014F PE is 16.5x, below the peer-average of 22x.

INVESTMENT HIGHLIGHTS

• Net profit rose 9.5% yoy on higher tuition fees and well-managed costs. OEL reported an 8% yoy increase in tuition fees as rates across all grade levels were revised higher. Personnel expense rose less than top-line at 5% yoy, which we take as a good indication of the group’s power to effectively pass on costs. The school’s fees are still 17-30% below its peers.
• 2.75 S cents/share proposed final dividend which translates to a 50.5% payout. The group’s cash balance stood at a healthy S$111m as at end-Dec 13. This is net of S$53m capex spent for the land in Pasir Ris and development of its new campus. Ongoing capex needs will impact cash flow going forward as OEL carries on with the construction of its new campus.
• Development of new campus on schedule and on budget. The new campus will be ready for the Aug 15 school year. Development costs are not expected to exceed the S$233.5m budget. The group will be conducting a fundraising exercise in 1H14 through debt, equity or a mix of both. Management continues to actively engage with several relevant parties and we reckon a  decision will be made soon. We estimate OEL will need to raise about S$130m or half of the total project cost (including the land premium). Our model factors in S$130m of borrowings in 2014.
• Projected 2014F net profit increase of 9% yoy to be driven mainly by higher tuition fees. The school has raised tuition fees by 8.5% on average for the current academic year. While upside on student intake may be limited by capacity constraints, we think there is still room for OEL to increase fees for the school year beginning Aug 14. Growth in staff headcount will also be limited in the near term and any increase in personnel expense will likely be attributable to salary adjustments.
• Key risks for the group this year include: a) inflationary pressure on personnel expenses, and b) execution risk as OEL manages construction and pre-operating costs in the next 1.5 years and aims to complete its new campus on time

Overseas Education

Uobkayhian on 14 Aug 2013

Valuation

• Maintain BUY with a higher target price of S$0.92 based on a 3-stage DCF model. The implied 2014F PE is 15.8x. 

1H13 Results

• Revenue and earnings within our expectations. Overseas Education (OEL) reported total revenue of S$51.2m (+10.4% yoy) and net profit of S$11.5m (+22.2% yoy) for 1H13, representing 50% and 55% of our fullyear forecasts respectively. Tuition fees collected rose 12% yoy mainly due to fee revisions across all grades of Overseas Family School (OFS) for the academic year that commenced in Aug 12. Interest income jumped 170% yoy as interest-earning deposits increased after the IPO proceeds were received.
• Staff cost contained as school approaches full capacity. Personnel expenses increased 3.1% yoy on the back of higher headcount. OEL also recorded S$1.1m of share subsidy for staff shareholders in 1H13. This is attributable to the subsidy provided by the group to staff shareholders in the recent IPO exercise. Total operating expenses rose 6.5% yoy. 

Stock Impact

• Average tuition fee increase of 8.5% for the academic year commencing Aug 13 to drive revenue growth in 2H13. We estimate utilisation of OFS’s existing premises at Paterson Road to be at a high 97%, restricting the growth in student enrollment. The opening of a new campus in 2015 will increase the school’s capacity by at least 22% (4,800 students) and allow for more competitive pricing. Currently, OFS’s fees are still 15-25% below their competitors’ and we expect the gap to narrow.
• New campus in Pasir Ris on schedule to be completed in time for the school year commencing Aug 15. OEL has secured all the necessary documentation and may commence construction on the 5ha site any time soon. With the use of pre-fabricated panels, management is confident that it can complete the development within 24 months. 
• Strong cash balance; no debt. OEL’s cash balance stood at S$114.5m as of end-Jun 13 (end-12: S$94.5m). 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 continue to remain in a net cash position. Based on our capex estimates, we believe OEL will require about S$50m in debt financing in 2015.
• We raise our 2013-15 earnings forecasts by 5-13% on higher tuition fee increases than we originally estimated. In our DCF model, we also adjust our risk-free rate assumption to 3% (from 2.2%) and consequently, our cost of equity to 8.5% (from 7.7%).

Overseas Education

UOBKayhian on 11 Apr 2013

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.