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.