Raffles Education

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Credit Suisse keeps Raffles Edu at outperform By ANGELA TAN

SINGAPORE - Credit Suisse reiterates its 'outperform' call with unchanged $1.15 (US$0.75) target price on Raffles Education following announcement by the latter's 29.9 per cent-owned associate Oriental Century that its CEO has allegedly inflated sales and cash balances.

'The facts are that Raffles Education remains a passive investor in Oriental Century with a 29.9 per cent stake and without a management role; on our estimates, Oriental Century's associate contribution appears negligible at 3 per cent of FY09 earnings,' the research house said in a note.

In the worst case scenario, Raffles Education said it could fully write off its investment in Oriental Century, implying a $34.6 million non-cash impairment charge, which could reduce the broker's FY09 net profit estimate by 32 per cent.

After the trade suspension was lifted, Raffles Education shares sank to 25.5 cents before inching t trade around 35 cents, up 3.5 cents from pre-suspension levels.

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From DBS:-

Oriental blues
We believe the fraud issue at Oriental Century is isolated and the drop in REC’s market cap has more than reflected this. P&L impact is minimal at 2%. Worst-case potential write-off is $34.6m (1.5cents/share). Fundamentals of REC remains firm and valuation is attractive, being close to the 5.5x PER, a level not seen since its listing.

Cash misappropriation in Oriental Century. The CEO of Oriental Century (ORIC), 29.9% owned by Raffles Ed, has allegedly misappropriated cash. He is said to have also inflated sales and cash balances over the years and diverted unspecified sums to an interested party.

P&L impact on Raffles Ed minimal (2%). Raffles Ed (REC) has no management control and board seat. The profit impact is minimal at c.2% on our forecasts. The worst-case scenario is the impairment of this investment ($34.6m or 1.5cents/share) if ORIC ceases to be a going concern.

REC’s operations unaffected. Management maintained that its own operations are still robust. Except for ORIC, they have management control in their recently acquired entities (Oriental University City, Shanghai Zhongfa, Tianjin Boustead, Shaanxi Electronic Information Institute and Wanbo College).

Drop in market cap > potential write-off. REC’s market cap has eroded by over $200m arising from this, far exceeding the potential $34.6m write-off. We think it has more than compensated for the investment.

Maintain recommendation. There is no doubt that sentiment is affected by the recent spate of governance issues on S-shares. But, we believe the current situation is confined to ORIC and the market has priced that in. Management has, so far, delivered growth and valuation is at a significant discount to peers trading at an average pe of 22x. TP: S$0.78.

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DJ MARKET TALK: CLSA Cuts Raffles Education Target To S$0.35

0647 GMT [Dow Jones] STOCK CALL: CLSA cuts Raffles Education (E6D.SG) target price to S$0.35 from S$0.45 after raising equity risk premium to better reflect increased risk of running schools in China following recent disclosure of accounting problems at associate Oriental Century (5II.SG).

But notes impact of Oriental Century's woes on Raffles Education limited since associate accounts for just 9% of latter's book value, 2% of FY08 earnings. Still, remains bearish on company's outlook; "we expect a 2% reduction in the company's student body as fewer students can afford to pay up to US$10,000/year for its programs and we don't believe the company will be able to put in place any new fee increases."

Adds growth from newly-acquired Oriental University City will be limited in next few years as it'll take 2-3 years to break even. Keeps Sell call. Stock +7.4% at S$0.365.

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Raffles Edu needs to tighten checks on investments By OH BOON PING

THE accounting scandal at Oriental Century Ltd has undoubtedly struck a blow at Raffles Education, which owns a 29.9 per cent stake in the China-based education provider.

Oriental Century shocked the market yesterday when it said its chairman and CEO Wang Yuean had confessed to having - over several years - inflated sales and cash balances and had diverted unspecified sums to an interested party.

But what's also surprising is Raffles's hands-off approach to Oriental Century.

So what is so special about Oriental Century that its biggest shareholder Raffles Education did not insist on board representation or carrying out its due diligence?

During a teleconference yesterday, Raffles' chief executive Chew Hua Seng admitted that the group had relied primarily on Oriental's IPO prospectus, without conducting separate checks when it bought a significant stake in 2006. Even more surprisingly, Raffles is not represented on the management, even though it now owns nearly 30 per cent in Oriental.

When queried, Mr Chew said that 'Oriental Century is a listed company with its own set of prospectus, governance and auditors. Even if we are shareholders, we cannot just go in and carry out the due diligence'. Plus, the business model at Oriental is sound, as the China-based education provider runs three colleges and provides other ancillary courses catering to the rising education demands in China. 'If the business model is working, why fix it?' he added.

Sounds well and good. Except that these are no reasons for not doing the proper checks, not when the company has since pumped in over $30 million worth of investment.

And it seems odd that the biggest shareholder did not even ask for board representation, if only to ensure that its investment is safe.

Plus, as Raffles is now painfully aware, even listed companies also have their fair share of 'fraud' cases. Names such as Auston International and China Aviation Oil immediately come to mind.

True, a strong corporate governance structure certainly helps to mitigate the risk of accounting scandals, but this is of minimal use if there isn't sufficient oversight at the ground level.

A case in point was CAO which appeared to have a proper risk management system in place. However, a clear lack of enforcement allowed the former CEO Chen Jiulin to override the system and he nearly brought down the company with his heavy trading losses.

A second issue concerns the adverse impact the scandal will have on Raffles.

Yes, Oriental's contribution to the group's $99.4 million net profit last year amounted to just two per cent and the group said it will not be materially affected by the latest development.

However, it is clear that should Oriental eventually cease to be a going concern, Raffles may have to write off its entire $34.6 million stake - potentially wiping off a big chunk of its FY09 earnings.

In addition, Raffles' brand name among the investment community can be expected to take a hit by the entire saga.

For a group that has grown rapidly largely through acquisitions, the latest news also raises investors' concerns about Raffles' many other investments in China.

In this regard, Mr Chew assured reporters that the Oriental incident is a one-off case, as it carried out its due diligence and staggered the payments according to pre-set milestones, while retaining management and cash control of its other China-based schools.

But regardless of the soundness of those investments, one thing is clear: Raffles will now have to tighten its investment checks as its shareholders deserve no less.

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Vested.

RAFFLES EDUCATION - Education company Raffles said a total of 80 million placement shares will be alloted and issued at a price of S$0.381 per placement share.[

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From Lim & Tan:-

Raffles Education is placing out, through Nomura, 80 mln new shares at 38.1 cents, which is 9.9% discount to yesterday’s volume-weighted average price of 42.2 cents.

The new shares, representing 3.41% of existing issued capital, will be placed with institutional and other investors outside Singapore, as well as existing shareholders. (See below for the Top 5 shareholders.)

Following the placement, Raffles Education will have 2425,499,156 shares on issue. At yesterday’s 40.5 cents, the market cap will be $982.33 mln.

The exercise will raise $30.1 mln, which approximates the investment-to-date Raffles has made in 29.9% owned associate Oriental Century
since Dec’06, as disclosed on March 10th, when doubts were raised on Oriental’s cash balance. Raffles had also estimated worst-case write-down at $34.6 mln.

Raffles Education and Oriental Century share a common director in Prof Tan Teck Meng.

Exhibit 1: Top 5 Shareholders Name % / Held
Chew Hua Seng 34.86
Fidelity Management 9.01
UBS 4.96
Gay Chee Cheong 4.86
Lloyd George Invt 4.84

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From CIMB:-

Raffles Education Corporation (REC) has placed out $30.5 million worth of new shares. The education services provider will issue 80 million shares at 38.1 cents apiece and said that the placement yesterday was 'comfortably oversubscribed'. The price was a near 10 per cent discount to the stock's average traded price of 42.3 cents on Tuesday.

The shares were placed with institutional and other investors 'outside Singapore', as well as existing shareholders. REC's substantial shareholders include Singapore's FIL Investment Management, which owns about 8 per cent of the company. Nomura Singapore was the placement agent. BT understands that senior banker Patrick Lee from Nomura was in charge of the deal.

To 'facilitate the placement', REC said that its chief executive Chew Hua Seng had agreed to lend up to 80 million shares to Nomura for delivery to placees. The shares will be returned to Mr Chew five business days after completion of the placement. All of the funds will be used to repay loans, which REC said it had drawn for acquisitions and as working capital. It said that the move would reduce net debt about 20 per cent and lower its net gearing.

Based on REC's financial statements for the half-year ended Dec 31, net debt comes to $130 million. An analyst said that the share placement would allay some fears in the market over REC's short-term borrowings. 'With the credit tightening, there was a lot of concern
whether Raffles Education's high short-term borrowing would pose a problem,' he said.

He expects part of the funds to be used to repay short-term loans of $164 million. 'They are looking to bring the gearing back to zero,' he said. REC said that its debt-to-equity ratio was 0.23 times at end-2008. Its biggest buy so far is the $392 million acquisition in
2007 of campus operator Oriental University City in Hebei, China.

Two weeks ago, Oriental Century, which is 29.9 per cent owned by the Raffles Education group, said that its chairman and CEO Wang Yuean had admitted inflating sales and cash figures. When asked if any of the placement proceeds would be channelled to Oriental Century - a $34.6 million investment - the company merely reiterated that the money would be 'fully used' to repay banking facilities. (BT)

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Vested. From DBS:-

Raffles Education (Buy, TP: $0.78) placed out 80mil new shares at $0.381/share. According to the company, the private placement to institutional investors was oversubscribed. Technically, we see psychological support
at $0.38, which is the placement price.

If the share price is able to rise above its recent high of $0.445 that coincides with the 65-day MA, the next major technical level is $0.56.

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Vested. From CIMB:-

• New share placement positive. RLS plans to use S$30.1m of net proceeds from a recent share placement to reduce its bank borrowings. We view the share placement positively despite dilution as it should boost confidence in the company’s ability to attract new investors, and alleviate near-term cash concerns.

• Realising the value of OUC. Management plans to enter into JVs/profit-sharing agreements with the schools in OUC, by swapping land and buildings for shares of future earnings. Assisting this would be a regulation from the mainland education ministry which requires schools to own their own land and buildings by 2011.

• FY09-11 EPS estimates reduced 4%, to incorporate dilution from the equity placement and scrip dividend scheme.

• Maintain Neutral; target price raised to S$0.35 (from S$0.30). Uncertainties surrounding a potential S$34.6m write-off for ORIC, and dilution from potential future fundraisings and the scrip dividend scheme are likely to cap near-term price upside. HGowever, the placement should alleviate immediate cash concerns. Hence, we have raised our target price to S$0.35, now based on 6x CY10 P/E, the previous trough, from S$0.30 (based on 5.5x CY10 P/E). Maintain Neutral.

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Vested. From OCBC:-

Raffles Education Corporation: Seeding the clouds. Initiate with BUY

30% growth in FY09F. We are forecasting Raffles Education Corporation (Raffles) to grow its bottomline at a clip of 28% in FY09F. While long-time investors have been used to higher growth trajectories, we think that Raffles will be using this year to refine its operations in its schools. The difficult credit and equity situation will not present them cheap financing opportunities as it had in the past. As such, we think Raffles is unlikely to undergo another bout of major acquisitions that will boost its financials. On a quarterly basis for FY09F, Raffles could face resistance to growth due to slower student recruitment and very minor fee hikes (in the light of the difficult economic situation).

Prime asset overlooked. While the market looks at Oriental University City (OUC) as an outsized investment, we are of the view that it is Raffles' prime asset that will drive growth in the next few years, if run properly. The land bank and its possible plot sales, set up of more private colleges on campus and ready pool of current students to recruit into its own programs hold tremendous potential.

Reduce dividends? We think more investors may opt out of the scrip dividend scheme. Although Raffles has not indicated so, we anticipate that Raffles could reduce its dividends to 0.75 S cents/quarter (vs current 1 S cent/quarter) to preserve more cash. We are assuming that the scrip program will continue indefinitely with a 50% subscription rate. This will translate to about 4-5% dilution every year.

Attractive valuation, initiate with BUY. We are using a PER-type valuation for Raffles as we think that earnings growth will drive its share price. Raffles has traded in a wide spectrum, ranging from ~34-78x in 2007 to its recent 52-week low of ~8x PER during the Oriental Century scandal. Concomitant with the volatile equity market conditions, we think recent lows have primarily factored in the funding needs for its expansion (especially OUC's RMB2b price tag), cloudy sentiments of S-chips, its slowing growth in student numbers and ability to operationally execute well with an enlarged geographical footprint.

As such, we peg our valuation to a blended 12x FY09/10F PER, closer to its lower trading band. Our fair value is S$0.60 (46% upside). Initiate with BUY. Dividend yield for FY09F is attractive at ~8% despite our 0.75 S cent/quarter assumptions. Sustained margins that trump our estimates and continued ability to grow student population beyond our forecasts will incentivise us to edge our valuation upwards.(Kelly Chia)