Excerpts from CGS-CIMB report
Analysts: Ngoh Yi Sin & Caleb Pang Huan Zhong
|Hard work pays off
■ OEL’s FY19 core net profit of S$8.0m was a slight beat; it rose 15.9% yoy, despite marginally lower revenue of S$82.0m.
■ Reiterate Add on earnings growth, attractive yield and historical low valuation of 16.8x FY21F P/E (1 s.d. below 4-year historical mean).
“Revenue was spot on at S$82.0m, with stable student enrolment numbers in 2H19 as the key positive after consecutive declines since FY14.”
FY19 net profit up 15.9% yoy, above expectations
Overseas Education (OEL SP) reported FY19 core net profit of S$8.0m (+15.9% yoy), which accounted for 106%/105% of our/consensus full-year forecasts.
The slight beat came from lower-than-expected operating expenses, specifically lower finance costs (recall that its bank loan was refinanced in April 19 at 3.4% per annum instead of the previous interest rate of 5.2%).
Revenue was spot on at S$82.0m, with stable student enrolment numbers in 2H19 as the key positive after consecutive declines since FY14.
Little impact from Covid-19; healthy level of enquiries
International schools in Singapore like OEL remain operational despite the onset of Covid19, unlike their peers in Hong Kong whose classes remain suspended until at least 16 Mar.
News reported that the lack of visibility on HK school reopening could disrupt the entire school year and threaten the departure of a significant number of families.
According to the management, the virus outbreak has not caused student withdrawals for OEL, and it continues to see healthy levels of enquiries (since HK protests started in Jun 19).
We think OEL’s smaller class size of less than 25 (vs. 30-35 students on average for other schools in Singapore), and a bigger campus help towards lowering exposure to large crowds.
The group declared a final DPS of 2.75Scts for FY19, in line with its dividend track record since listing in 2013.
This is equivalent to a payout ratio of 143% and a 7.5% dividend yield.
With revenue reserves of S$66.5m (as of end-2019), minimal capex needs and projected FCF of S$25m-27m p.a. (FY19: S$27.7m), we believe OEL can maintain its dividend payout at S$11.4m over FY20-21F
Still an attractive dividend play
|Reiterate Add with unchanged S$0.42 TP
We continue to like OEL for its prudent management, attractive dividend yield and steady earnings growth.
We raise our FY20-22F EPS by 0.9-1.1% on the back of higher other income. We reiterate our Add rating and TP, based on 19.5x FY21F P/E which is at -0.5 s.d. of its 4-year mean.
Apart from the historical low valuation, we see privatisation potential for the stock given that it is 65% controlled by two significant shareholders.
A higher number of foreign students relocating to Singapore is a potential re-rating catalyst.
Risks are unfavourable policy changes, rising competition and unexpected dividend cuts.
Full report here.