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