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Overseas Education Ltd (OEL SP) Summary

Core Content

Overseas Education Ltd (OEL SP) is a Singapore-based international school operator, currently trading at SGD0.64 with a target price of SGD0.72 (+13%). The company's market capitalization is USD188M, and the document outlines a downgrade from BUY to HOLD due to weak student enrolments, a lack of short-term catalysts, and a poor economic outlook.

Main Points

• Enrolment Trends:

  • Enrolments have been weak in 2015, with a 17% YoY decline in 1H15.
  • The company expects continued weakness in new enrolments for FY15-17, with a forecast of 700-755 students per annum.
  • Student departures have increased, with an estimated 600 students leaving in 2016 and 425 in 2017.
  • The move to Pasir Ris caused a loss of approximately 700 Junior students over the last two years.

• Tuition Fees:

  • Tuition fees are expected to increase by 3.5% annually, in line with industry peers.
  • The company managed to enroll 427 new students in 1H15, but this is not expected to improve significantly in FY16-17.

• Industry Dynamics:

  • "First-tier" schools like SAS, UWCSEA, and Dulwich College are operating at full capacity with waiting lists.
  • "Second-tier" schools, including OEL, are more affected by the decline in international student numbers.
  • Some schools, such as Australian International School and German European School, are expanding, raising concerns about over-supply in the industry.

• Valuation and Forecast:

  • The company's core EPS estimates for FY15-17 have been cut by 17-29%.
  • The DCF-based target price has been reduced to SGD0.72 from SGD1.09, equivalent to 18x FY16 P/E and 15x FY17 P/E.
  • The WACC has been increased to 9.1% from 6.8% due to a higher Beta of 1.2, reflecting increased risk premium.

• Financial Performance:

  • Revenue is expected to remain flat or slightly declining for FY15-17.
  • EBITDA and core net profit are projected to decline, with EBITDA growing from 30.8M to 43.1M by FY17.
  • Free cash flow is projected to be negative in FY15 and FY16, turning positive in FY17.

Key Information

• Share Price Performance:

  • Over the past 12 months, the share price has declined by 30.2%.
  • The stock has underperformed the market, with a relative decline of 23.2%.

• Valuation Metrics:

  • Current P/E ratio is 16x FY16E, while the target price is 18x FY16E.
  • The P/BV ratio is 1.4x for FY17, indicating a potential undervaluation.

• Company Structure:

  • OEL has a free float of 35.6% and a market cap of SGD263.8M.
  • Major shareholders include Perry David Alan (32.6%), Wong Lok Hiong (31.3%), and Eastspring Investments (7.0%).

• Risk Factors:

  • Continued weak demand for international education in Singapore.
  • Over-supply risk due to expansion of some schools.
  • The impact of expatriate demographics shifting towards younger individuals, affecting future student numbers.

Financial Tables

Enrolments and Tuition Fee Assumptions

Valuation and Key Ratios

Peer Comparison

Conclusion

OEL is facing significant challenges due to declining student enrolments and increasing departures. Despite a slight increase in tuition fees, the company's financial performance and valuation metrics have deteriorated. The downgrade to HOLD reflects the lack of positive catalysts and the weak business outlook. The risk of over-supply in the international education sector adds further pressure on the company's prospects.