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%).