Raffles Education

[winston]

Vested. From UBS:-

Weighted down by aversion to S-Chips

Labour shortage remains an issue
In our February Asian Structural Themes Q-Series®, REC was highlighted as a key pick among companies exposed to labour shortages across Asia. As explained in an update published today “Impacts of the current economic slowdown on future labour shortages in Asia”, we believe that despite the severity of the current
economic downturn, labour scarcity continues to be a major long-term structural theme for Asian countries.

REC well-positioned to tap favourable structural theme
We believe that as labour supply becomes scarce, capital inputs, particularly productivity gains, increase in importance. In our view, this should translate to investment in fixed capital, training and education, and potentially benefit REC. The company operates three universities and has a strong network of 25 colleges in
nine countries offering a vast range of vocational and technical courses.

Price weakness dominated by risk aversion towards S-Chips
Price weakness has been dominated by risk aversion towards S-Chips and accounting irregularities at associate company Oriental Century (ORIC). We believe the sell down is overdone as:-
(1) REC’s exposure to ORIC is limited to a 4% earning contribution;
(2) REC has a superior dividend payout record that sets it apart from peers; and
(3) management has taken proactive steps on debt retirement.

Valuation
Our DDM-based price target of S$0.81 assumes 11.9% COE and 5% terminal growth. We think with continued dividend payout and de-leveraging events, REC should re-rate to reflect its resilient growth profile, defensive earnings and strong cash flow.

[winston]

Vested. From DBS:-

Raffles Education turned above its March high level of $0.445 yesterday. Technically, there is upside to $0.49 followed by $0.56. The stock’s 200-day EMA is at $0.63 while January high is at $0.625.

[winston]

Vested. From DMG:-

Raffles Education to invest 5m yuan in China school

A day after announcing a new investment in India, Raffles Education said it will pump in five million yuan (S$1.1 million) into a new school in China. Yesterday, the education group said it has forged a partnership with Langfang Development Zone Oriental University City Zhongxin
Education Investment to establish the Oriental Vocational College.

The school will offer diplomas in fashion design, multimedia design, IT and eco-tourism, and expects to accept its first intake of students in September. With the addition of the Oriental Vocational College, the group will now operate three universities and 26 colleges across 10
countries in Asia-Pacific.

Additionally, the investment dollars will be injected into the school over five years. On Monday, Raffles said in a press release that it will invest US$500,000 into a new college in Bangalore, offering advanced diplomas in fashion design, graphic design, and fashion marketing.
Educomp Solutions, its partner in that joint venture, will similarly contribute US$500,000 and the Bangalore school is scheduled to accept its first intake in July.

Last month, Raffles was hit by troubles at its associate company Oriental Century, which reportedly inflated sales and cash figures for years. Raffles has a 29.9 per cent stake in Oriental Century and does not rule out taking over the management of the troubled company.

Source: Business Times

[winston]

Vested. From Kim Eng:-

Raffles Education – Initiating coverage (Pauline Lee, DID: 6432 1453)
Previous Day Closing price: $0.46
Recommendation: BUY
Target price: $0.60

The largest private education provider in Asia
Raffles education is a leading private education provider in Asia. It offers diploma and degree programs in design for fashion, graphics and other industries. Since establishing the first college in Singapore in 1990, the group has grown significantly. It now operates 26 colleges and 3 Universities across the Asia Pacific. Design education constitutes 65% of its operating profits and over 70% of its revenue comes from China.

A clear leader at humble valuations
Raffles is one of the cheapest education stocks among its listed peers, trading at more than 50% discount to its US-listed peers. Such steep discounts are unwarranted and points to deep undervaluation of the stock considering its superior earnings track record over the decade, outstanding margins and remarkable growth momentum. Its commitment to generous dividend payout (>85%) adds to its appeal.

A Fast learner
Despite the dearth of acquisitions, the management expects enrolment to grow 20-30% per annum by focusing on its enlarged education network. We estimated rising student enrolment to sustain organic earnings CAGR of 24% for the next 3 years. This works out to a recurring annual earnings stream of at least S$100m. Moreover, its ability to go for proprietary degrees is a competitive edge to drive superior margins.

Growth drivers aplenty, execution is the key
We see great potential in the recent acquisition of OUC given its strategic location at Langfang Development Zone and potential to boost student enrolment by over 70%. We estimate net profit contributions from OUC to amount to at least $30m, which could potentially boost the FY10 earnings by more than 20%. The OUC contributions that we have yet to factor in our earnings projections could offer positive catalysts.

Enrol now!
The recent share price correction to trough levels of 7x forward PER presents an unprecedented opportunity to invest in the stock. Raffles education offers a good mix between growth and attractive dividends. We are initiating coverage on the stock with a BUY with a target price of $0.60 using 0.7x PEG (based on a forward 3-year earnings CAGR of 17%).

[winston]

Not vested anymore. From Kim Eng:-

Raffles Education – 3Q09 results (Pauline Lee 64321453)
Previous day closing price: $0.51
Recommendation: Buy (maintained)
Target price: $0.60 (maintained)

Hit by impairment charges
The group recorded a net loss of $16.5m in 3Q09 as it wrote off the $34.6m allowance of impairment for Oriental Century in the quarter. 3Q09 core net profit after adjustment of exceptional items was $14.65m (-27% yoy, -38% qoq). 9M09 core net profit of $66.2m was below our expectation mainly due to lack of growth in student enrolment, hefty set up costs of new premises, its more prudent bad debt policy and lower forex gains.

Short-term pain
Normalised core earnings in 3Q09 weakened as operating costs out-paced revenue. Rental costs surged in line with the business expansion and additions of OUC, Wanbo and Shaanxi, while personnel expenses rose 27% qoq due to expanded headcount. Meanwhile the lack of student enrolment during the seasonally weak recruitment period (total students 32797 vs 32873 in 2Q09) weighs on its top-line.

Long-term gain
OUC continues to contribute positively to the group’s earnings, as its profit in 9M09 more than doubled yoy to $10.6m. Growth potential from OUC remains huge, while the new colleges in Bangalore, Jakarta, Langfang, New Delhi and Yunan will contribute positively to student enrolment going forward. The group expects student enrolment to pick up by 4Q09, targeting a 15% increase in student population by year-end.

Cash conservation is the priority
No dividends were declared this quarter, the first time since listing, as cash conservation has become the key priority. Positioning to be a stronger education player in the next upturn, the group aims to strengthen its balance sheet by reducing its gearing from 1.1x to zero by 2010.

Near-trough valuations reflect earnings weakness
We have reduced our earnings estimates for FY09/FY10 by 27% and 12% respectively as we built in lower student enrolment in FY09 and higher operating costs. However, with the stock trading near to the low of its PER cycle, weak earnings could have been priced-in. Moreover, its strong free cashflows of $117m YTD (+189% yoy) supports its value proposition of defensive earnings. Maintain BUY.

[winston]

Impairment charge hits Raffles Education results

Raffles Education Corporation yesterday reported a $16.5 million loss for its third quarter ended March 31, mainly on account of an allowance for impairment of investment in an associate company. Raffles Education - the largest private education provider in the Asia-Pacific region -reported a $19.4 million profit for its 2008 fiscal Q3.

Turnover during the latest reporting quarter was up one per cent to $49.9 million, from $49.2 million a year earlier. Raffles Education said
that it made a $33.1 million allowance for impairment of investment in associate company Oriental Century. A reversal of its share of $1.5 million in Oriental Century's profit in the first half of fiscal 2009 is also reflected in its balance sheet. The allowance and reversal, with higher staff costs, overheads and finance costs, resulted in the latest loss.

The company said that without the impairment charges, its profit before tax would have fallen about 10 per cent from a year earlier.
For the nine months ended March 31, Raffles Education saw a 17 per cent drop in net profit attributable to equity-holders to $42.03 million, despite a 23 per cent increase in revenue to $157.2 million. It said that it would have registered a 45 per cent increase in its bottom line to
$77.2 million for the nine months if not for the impairment allowance and the Oriental Century profit share reversal.

Raffles Education said that the decline in its nine-month profit was primarily due to the impairment allowance, higher staff and the cost of setting up new colleges in Bangalore, Jakarta, Langfang, Yunnan, Tianjin and New Delhi. These colleges are expected to contribute to the bottom line during fiscal 2010.

Source: Business Times

[winston]

Not vested. From DBS:-

Taking on the Oriental blues
• 3Q registered a net loss due to allowance for impairment of Oriental Century ($33.1m).
• Results below expectations due to slower enrollment growth and higher operating expenses
• No dividends declared in order to conserve cash
• Trimmed earnings but TP unchanged at $0.78 as we roll valuation to FYE Jun 2010.

3Q09 registered a $16.5m loss. 3Q topline grew 1% yoy while bottomline registered a loss of $16.5m, largely arising from the allowance for the impairment of an associate company – Oriental Century. Below-expected results were due to higher operating expenses and slower than expected topline growth

No dividends declared. No dividends were declared, despite having the scrip dividend scheme in place. While some investors may not like this, we think this is an appropriate stance in view of its current debt position. Management shared that they target to be debt-free by
end FY10F.

Trimmed forecasts by 10% - 26%. We trimmed our forecasts by -26% (FY09F), -13% (FY10F) and -10% (FY11F). This is largely on assumption of slower growth in students’ enrollment. The change in FY09F is larger as we take into account the allowance for impairment of the associate company.

Buy, TP: S$0.78. Our TP is unchanged at $0.78 as we roll over our valuation to FY10F, still based on 18x earnings, a discount to regional peers. Maintain Buy as we continue to see Raffles Ed continue to deliver on its growth plans, albeit slower (from a larger base) and its regional presence in the education space.

[winston]

Not vested. From CIMB:-

Below. 3Q09 core net profit of S$11.5m (-41% yoy) was below with our expectations, representing 11% of our FY09 estimate and consensus due to higherthan- expected operating expenses and lower-than-expected student enrolment. Reported net loss of S$16.5m included a one-off Oriental Century (ORIC) write-off and profit contribution reversal.

Other non-core items were a S$6.5m profit from the sale of land as guided by management. 9M09 core net profit of S$56.3m forms 54% of our FY09 estimate and 51% of consensus. Core net profit margin slipped to 23% from 39%, on the back of higher operating expenses and start-up costs for new colleges. Meanwhile, topline was flat yoy at S$49.9m due to weaker-than-expected student enrolment. No dividend was declared.

• ORIC write-off and profit reversal. Management took the prudent approach by writing-off a S$33.1m investment in ORIC and reversed a S$1.5m profit contribution in 1H09. However, it maintains that a takeover of ORIC is possible.

• Start-up costs, bad debts and provisions ate into profits. Besides rising costs from expanded operations, RLS also reported S$3.7m of bad debts, provisions, JV fees and start-up costs which contributed to the decline in profitability.

• FY09-11 core EPS estimates cut by 17-23% on the back of higher operating expense and lower student enrolment assumptions. While new schools are expected to commence enrolment this year, we do not expect significant contributions in the first two years.

• Maintain Neutral; target price raised to S$0.44 (from S$0.35). The weaker-than expected net profit was partly due to management’s expansion plans to drive longterm growth. With credit at a premium, start-ups are the only expansion route as capital required is significantly lower. Taking into account management’s strong track record, commitment to lower debt levels, and a recent share placement which has alleviated near-term cash concerns, we believe the company is on the right track.

Given lower risk aversion in the market, we now peg our target price at a 30% discount to the low end of peer valuations, reflecting the company’s weaker growth profile, instead of trough valuations. Consequently, our target price has been raised to S$0.44 (9.5x CY10 P/E) from S$0.35 (6x CY10 P/E). Maintain Neutral on valuation grounds.

[winston]

Not vested. From OCBC:-

Imputing impairment in 3Q09. Raffles Education Corporation (Raffles) reported a loss-making quarter (-S$16.5m) as it had decided to book in S$33.1m as allowance for impairment charges for its associate Oriental Century (ORIC). Excluding this non-cash charge and land sales (as continued payment for Oriental University City, or OUC), Raffles' 3Q09 net profit would have come in at S$14.7m. Student numbers held steady instead of a marginal increase as we anticipated as recruitment drive slowed.

Securitising OUC. Management continues to be optimistic about OUC and shares our sentiments that it is a well worth investment to embark on its next phase of growth. We were updated on the plan to pay for this asset by securitising it. To do that, management hopes to list OUC in China/HK (earliest in 2011) due to listing rules requiring operating history of three years under Raffles' jurisdiction.

Currently, the majority of the debt (~S$320m) owed by Raffles for OUC is primarily to the provincial government supporting this University City project. While Raffles will continue to pay down this debt, we expect it to fulfil a significant part through the listing. As such, post listing, it will remain a major shareholder along with the provincial government.

No dividends. Raffles will not be paying any dividends this quarter. The Dividend Re-Investment Scheme (DRIS) has also been terminated in view of the volatile share price and poorer-than-expected take-up rate. We had earlier forecast that Raffles would cut its dividend to 0.75 S cents/quarter to preserve cash and pay off its debts.

Trough reached, next year will be better. Raffles has undergone a winter season in the last months with the ORIC scandal coupled with a tight liquidity situation that has prohibited the company in embarking on an M&A route to grow the business. However, we think that the next year would start bearing the first fruit of its labour when it finalises the securitisation plan for OUC, aggressively pay down its other debt and refocuses on student recruitment for its new schools.

While the share price might take a tumble in view of its loss-making position this quarter, we look past this event and set our valuations to FY10F where the company will resume its growth trajectory. We roll our valuation to FY10F based on the same 12x PER, still close to its lower historical trading band. Our fair value is edged down slightly to S$0.59 (prev. S$0.60). Maintain BUY.

[winston]

Not vested.

Fidelity sold 23m shares, lowering their stake to 6.61%