Overseas Education Limited

(14-09-2018, 11:18 AM)cyclone Wrote: Request for Trading Halt : Pending release of announcement.

Request for Trading Halt just to announce about repurchase and cancellation of S$9.5 Million bonds due 2019, which had been announced yesterday and also two days ago.

OEL paid $11.4m in dividends in for FY18, and seems intent on maintaining this amount of dividends. Shareholders who bought OEL for its close to 10% yield will also be counting on management to deliver. But can they?

OEL recently restructured its $117m bonds into a $120m 10 year term loan. The interest rate on the new loan was not disclosed. Assuming that it is 5.5% p.a., OEL will be paying about $15m a year to its bankers, for the next 10 years.

Assuming that OEL maintains its $6m profit over the next 10 years, and assuming that OEL does not spend more than $1m on capex, it will be able to service the loan, largely as a result of the savings from $10m of depreciation. Assuming that OEL does not draw on past reserves -- as it has been doing for the past years -- it will only be able to pay a $5m dividend. This means a halving of current dividends.

Assuming that OEL maintains its $6m profit, and draws on past reserves to pay an $11m dividend, its present cash may be able to support the dividends for about 5 years. After which, dividends will have to be cut.

Unless revenue and profits improve, there is unlikely going to be a happy ending for shareholders. If it falls further, the results will be disastrous. Perhaps management believes that an improvement will eventually come. For now, OEL's revenue and 'fees paid in advance' continues to fall in its latest quarterly.


https://links.sgx.com/FileOpen/OEL_Term_...eID=542378

https://links.sgx.com/FileOpen/OEL%20Ann...eID=558220

(16-07-2019, 07:59 PM)karlmarx Wrote: OEL paid $11.4m in dividends in for FY18, and seems intent on maintaining this amount of dividends. Shareholders who bought OEL for its close to 10% yield will also be counting on management to deliver. But can they?

OEL recently restructured its $117m bonds into a $120m 10 year term loan. The interest rate on the new loan was not disclosed. Assuming that it is 5.5% p.a., OEL will be paying about $15m a year to its bankers, for the next 10 years.

Assuming that OEL maintains its $6m profit over the next 10 years, and assuming that OEL does not spend more than $1m on capex, it will be able to service the loan, largely as a result of the savings from $10m of depreciation. Assuming that OEL does not draw on past reserves -- as it has been doing for the past years -- it will only be able to pay a $5m dividend. This means a halving of current dividends.

Assuming that OEL maintains its $6m profit, and draws on past reserves to pay an $11m dividend, its present cash may be able to support the dividends for about 5 years. After which, dividends will have to be cut.

Unless revenue and profits improve, there is unlikely going to be a happy ending for shareholders. If it falls further, the results will be disastrous. Perhaps management believes that an improvement will eventually come. For now, OEL's revenue and 'fees paid in advance' continues to fall in its latest quarterly.


https://links.sgx.com/FileOpen/OEL_Term_...eID=542378

https://links.sgx.com/FileOpen/OEL%20Ann...eID=558220

It generates $23m free cashflow before financing on the new loan. Assuming you are right on the 5.5% p.a. on the new loan and therefore $15m to the banker. It will have a negative cashflow of $23m-$15m-$11.4m= -$3.4m. It has cash on hand of $37m as of end March 2019. Thus, it can support the dividend for more than 10 years after which the loan would have been fully paid.

For some reason, OEL has not been paying its taxes in full, for the past 2-3 years. Its income tax payables, based on latest quarter results, is close to $3m.

The $23m of FCF does not include taxes. Assuming that taxes of $1m a year is to be paid, an uninterrupted 10-year dividend of $11.4m becomes less tenable.

In any case, investors relying on such calculations are probably cutting it too close. And leaning far too much on a recovery of student enrollment.

My opinion is that there is no margin of safety in the yield.

(17-07-2019, 05:11 PM)karlmarx Wrote: For some reason, OEL has not been paying its taxes in full, for the past 2-3 years. Its income tax payables, based on latest quarter results, is close to $3m.

The $23m of FCF does not include taxes. Assuming that taxes of $1m a year is to be paid, an uninterrupted 10-year dividend of $11.4m becomes less tenable.

In any case, investors relying on such calculations are probably cutting it too close. And leaning far too much on a recovery of student enrollment.

My opinion is that there is no margin of safety in the yield.

Just trying to point out that your calculation of only having sufficient cash to support dividend of 5 years is too far off. :-)

I think the most important question is if revenues will rebound (will number of students/prices increase?) and will costs stop escalating. Or will the business continue to decline?

If the business is stabilises, I think the current dividend yield is sustainable actually as FCF is enough to pay dividend and interest payment, as long as bankers are willing to rollover the debt.

(17-07-2019, 05:11 PM)karlmarx Wrote: For some reason, OEL has not been paying its taxes in full, for the past 2-3 years. Its income tax payables, based on latest quarter results, is close to $3m.

The $23m of FCF does not include taxes. Assuming that taxes of $1m a year is to be paid, an uninterrupted 10-year dividend of $11.4m becomes less tenable.

In any case, investors relying on such calculations are probably cutting it too close. And leaning far too much on a recovery of student enrollment.

My opinion is that there is no margin of safety in the yield.

I thought it is quite obvious that the market does not believe the yield can be sustained.  Hence, it is pricing the stock at nearly 10% yield.

Of course there are people who will buy it expecting that it is 10% yield forever, but they are clearly in the minority.  

There are also a group of people who believe the market is stupid at pricing the stock at 10% and expecting it to some day wake up.

I am stockholder, but I buy & hold them because they do pay some dividends, have a business with minimal capex now after big upfront investments, and basically a call option on the business prospects.  I have no expectation that they will sustain the payout indefinitely, but the sooner the cash comes back the better.

Actually I thought it isn't unreasonable to price a small cap stock at 10% cost of equity (hence 10% dividend yield), especially if the underlying business isn't a stabilised one.

OEL has a market value of $120m and debt of about $120m. Its last FY earnings before interest, taxes, depreciation, and amortisation, was $26m.

So OEL has an EV/EBITDA of 9.2. Institutions (well most of them) usually look to sell (such as through IPOs) at an EV/EBITDA of 10, and buy (such as through tender offers) at 5.

So buying OEL at current prices could mean there is an expectation that EBITDA will more or less double in the foreseeable future. Certainly, such discussions are purely theoretical. And if investing were such straight-forward mathematical questions, primary school kids would have all been rich by just solving EV/EBITDA.

Perhaps the reason that the market prices OEL at 10% is because 10% is the (psychological?) trough; very very few stocks are priced above 10%. It is as though the market thinks that almost any risk is worth taking, for a 10% yield. My opinion, of course, is that I think this is erroneous, and that OEL at 10% is still quite pricey, given the circumstances.

3Q results out last evening..
https://links.sgx.com/FileOpen/OEL%20Fin...eID=585222

First sign of YoY quarterly revenue increase, which suggests a stabilisation of the business and a reversal of the downward trend to come?