Overseas Education Limited:
Cashing in on education
Price Target : 12-Month S$1.03
•Initiate coverage with Buy, DCF target price of S$1.03 implies 30% upside
•Stock pays 3.4% dividend yield, backed by strong cashflow generation
•Fee hikes to support near term earnings, new campus to accelerate growth in 2016
Recommend Buy for 34% total return. Overseas Education Limited (OEL) presents a highly cash generative business with operating cashflow growing at 48% CAGR over 2010-2013. Regional education service providers trade at an average of 21x current PE and 6% FCF yield. In comparison, OEL looks compelling at only 15x PE and a substantially higher FCF yield of 13%. The company has a dividend payout policy of at least 50% of earnings. This translates to a decent yield of about 4%.
Top international schools in Singapore. OEL is No.3 by turnover with a 10% market share. This private school offers both K-12 International Baccalaureate (IB) curriculum and the Cambridge-based secondary education (IGCSE) programmes to children aged between 3 and 18 years of expatriate parents in Singapore.
Singapore is No.1 expat destination in the world. More importantly, Singapore has the highest concentration of wealthy expats. Statistics show that 43% of expats here earned >US$250k (OEL’s target market), compared to global average of 7%. Despite regulations on the influx of foreigners, it appears that Singapore will continue to attract high flying expats.
Fee hike lifts near term profits, new campus in 2016 to accelerate growth. With 3,680 students, OEL currently operates close to its capacity of 3,940 students. Hence, we only expect 6%/10% fee hike to lift near term earnings. We see growth accelerating when the new campus in Pasir Ris is completed in 2016. Then, OEL can add 900 more students and raise fees, given newer and better facilities. During the construction period, FCF will turn negative but our forecast showed that FCF would rebound to a level higher than before upon completion of the campus.