Overseas Education Limited:
Expansion on course despite budget overrun;
Price Target: 12-Month S$1.01 (Prev S$1.03)
•New campus development finalised and awarded. Timing on track but S$261m investment costs exceed S$200m budget
•We raise our investment figure to S$280m but fine-tune staff costs & enrolment assumptions post-management update
•DCF fair value tweaked down to S$1.01
•Share price could soften on news of budget overrun but no change in fundamentals. Buy on weakness
S$261m development above budget. OEL has awarded construction of its Pasir Ris campus to Woh Hup P/L. The contract sum is S$233.5m (subject to certain adjustments), and together with a land premium of S$28m, the cost of the new campus YTD is S$261.5m. No doubt, the contract value is higher than management’s S$200m forecast during the IPO, but we believe the higher budget could be attributed to inflation, higher land premium and a design more comprehensive than initially planned. The contracted construction period is 19 months from September 2013 to April 2015.
Net gearing could hit 0.4 in FY15 if all debt-funded. Apart from S$130m in cash and IPO proceeds, we estimate that OEL will need another S$150m for the new campus. Assuming an all debt funding, net gearing will increase to 0.42 and 0.22 in FY15 and FY16 respectively. FCF will undoubtedly turn more negative during the construction period (FY14-15) but this will not impair OEL’s ability to generate cashflow to pay dividend.
TP tweaked down to S$1.01, Maintain Buy. While interest costs will be higher, the impact will be cushioned by lower staff costs, as we assume post-management update. Consequently, we have lowered our DCF fair value to S$1.01 from S$1.03 previously. We expect its share price to soften on news of the budget overrun, but considering that the expansion is still on course, we maintain Buy on OEL.
Publish date: 12/09/13