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27-07-2015, 10:59 PM
RHB Securities has published a report with a sell recommendation and a target price of 70 cents a share. Stock fell today from around 84 cents to around 77 cents. Presumably as a result of this report. The report is well written and the analyst has tried to do good research on the market. Whilst I don't disagree with many of the potential risks, I do think that the analyst is too bearish.
The report is here :
https://sites.google.com/site/researchre...072015.pdf
The main points that she makes are :
1. The new campus is in Pasir Ris which is far less attractive than Orchard Road and most expats live in districts 9 and 10 and many of those work in the financial district so Pasir Ris is far away.
No one can argue that Pasir Ris is less attractive than Orchard Road but I would point out that UWC has its second campus 4 KM away and that is full. Singapore American School is in Woodlands - hardly an expat ghetto, Canadian International School is in Jurong (as is Dulwich) and Stamford American School and Australian School are both in Serangoon. Whilst many expats would like to live in prime districts, many also live on the East Coast and given school busses, the location is probably less critical than the analyst argues. Her other point is that UWC is a stronger brand than Overseas Family School [the brand under which OEL operates] (I agree) and that hence UWC will soak up most of the demand from the East. I disagree with that as both UWC campuses are full, so even if parents want their kids to enrol, it is difficult to get a spot.
2. There has been a 32% drop in registration fees and the biggest loss in students appears to have been in the junior school as parents don't want their young kids to have such a long commute (assuming that the parents all live in Orchard). The analyst is concerned that this will impact future enrolment in higher grades as the lower grades move onto higher grades.
I think this is the biggest concern and one that needs close monitoring. However, I think we need to bear in mind that for kindergarten, there are plenty of good local alternatives that many expats use (Eton House, Pats school house etc) and I can see the logic in some parents switching from OFS to a local kindergarten. However, most expat parents then send their kids to international school for primary one. The only other international school in Orchard is International School of Singapore and Chatsworth and I don't think they have much extra capacity, hence, the kids will still have to commute whether to Jurong, Woodlands, Serangoon...or Pasir Ris. The other point to bear in mind is that most expats stay here for 3 - 5 years. As a result most international schools have a 20%+ turnover in students every year. So it is just not a case of catching them in Kindergarten and then they move up through he grades for the next 12 years.
3. Tight immigration policy will limit the # of expats on Employment Pass (and the statistics shown, show these numbers as stable rather than growing).
My own view is that the government is likely to relax this post the election but even if they don't, the target expats for the international schools are the high earners (after all, if you have 2 kids and have to pay $60,000 a year in total school fees, you will only relocate to Singapore if your company pays you well) and these high earners have high positions in foreign companies that the govt will want to support. Where I think the govt is likely to clamp down is on PMEs directly competing with many Singaporeans.
4. Higher supply of new schools (Dulwich and GEMS last year plus the govt is seeking tenders for additional schools - if successful, these schools are likely to emerge after 3 years given that campuses have to be built).
I agree there is higher supply and that the high capacity utilisation and increases in fees cannot continue indefinitely. However, I do think that the analyst has overlooked the fact that (1) certain schools cater to specific markets (eg Singapore American School is very focused on US citizens with a US curriculum as opposed to IB and hence competes less directly with other schools, Australian school ditto and Dulwich and Tanglin are very focused on the English market) and (2) there are also smaller schools with poorer facilities (eg Nexus, Chinese International, Chatsworth, International Community School....) where parents typically move their kids onto bigger schools once they reach P3 - . Hence, some market share will be taken from these smaller schools.
5. Expats have smaller packages these days and hence there is pressure on them to seek cheaper alternatives (local schools or international schools in Johor).
I agree with this but there are still plenty of more well paid expats, that can afford the top international schools and wouldn't consider anything else.
6. OFS has now raised its fees to similar levels as other top schools (most of which only raised fees by 3% this year whereas OFS raised them by 10%), so future fee growth is likely to only be in the 2-3% range.
I agree with this assessment. As I have stated in previous posts, the key here is to get the capacity utilisation up from probably around 3,300ish (down from 3,700 - 3,800 at their Orchard campus) to the maximum capacity of 4,800. That is what will cause the big jump in revenues. If that doesn't happen, then growth closer to inflation rates is likely.
7. Earnings are likely to be flattish with a stable dividend due to increased depreciation charges as well as interest charges (upon completion of the campus, interest is no longer capitalised but will be expensed) although cash flow will grow nicely.
If you subscribe to the analyst's view that OFS is unlikely to be able to grow student numbers significantly, then this makes sense but if you see room for growth, then she is being too negative. The analyst's view is that cash flow will grow nicely but is likely to be conserved to pay off the $150MM bond maturing in 2019 and hence an increase in dividends is unlikely in the near future. I guess this all depends whether the company wants to end up debt free or is happy to have a bit of debt outstanding, in which case it could increase the dividend.
Valuation wise, if the company is throwing off a lot of cash with small capex requirements, it also begs the question whether the market will use earnings or EBITDA multiples to value the stock.....
So, in conclusion, I think the analyst has done a good job highlighting the various things that could go wrong. I just don't agree with her that they will
. The key points for this stock is really whether you believe (1) that there is still sufficient overall demand in the market to fill up these schools (given new capacity from Dulwich, GEMs and OFS) and (2) that Pasir Ris is not so off the beaten track that OFS (which has a long track record as a school in Singapore) can still increase enrolment to 4,800.
Vested in bonds and shares.
The report is here :
https://sites.google.com/site/researchre...072015.pdf
The main points that she makes are :
1. The new campus is in Pasir Ris which is far less attractive than Orchard Road and most expats live in districts 9 and 10 and many of those work in the financial district so Pasir Ris is far away.
No one can argue that Pasir Ris is less attractive than Orchard Road but I would point out that UWC has its second campus 4 KM away and that is full. Singapore American School is in Woodlands - hardly an expat ghetto, Canadian International School is in Jurong (as is Dulwich) and Stamford American School and Australian School are both in Serangoon. Whilst many expats would like to live in prime districts, many also live on the East Coast and given school busses, the location is probably less critical than the analyst argues. Her other point is that UWC is a stronger brand than Overseas Family School [the brand under which OEL operates] (I agree) and that hence UWC will soak up most of the demand from the East. I disagree with that as both UWC campuses are full, so even if parents want their kids to enrol, it is difficult to get a spot.
2. There has been a 32% drop in registration fees and the biggest loss in students appears to have been in the junior school as parents don't want their young kids to have such a long commute (assuming that the parents all live in Orchard). The analyst is concerned that this will impact future enrolment in higher grades as the lower grades move onto higher grades.
I think this is the biggest concern and one that needs close monitoring. However, I think we need to bear in mind that for kindergarten, there are plenty of good local alternatives that many expats use (Eton House, Pats school house etc) and I can see the logic in some parents switching from OFS to a local kindergarten. However, most expat parents then send their kids to international school for primary one. The only other international school in Orchard is International School of Singapore and Chatsworth and I don't think they have much extra capacity, hence, the kids will still have to commute whether to Jurong, Woodlands, Serangoon...or Pasir Ris. The other point to bear in mind is that most expats stay here for 3 - 5 years. As a result most international schools have a 20%+ turnover in students every year. So it is just not a case of catching them in Kindergarten and then they move up through he grades for the next 12 years.
3. Tight immigration policy will limit the # of expats on Employment Pass (and the statistics shown, show these numbers as stable rather than growing).
My own view is that the government is likely to relax this post the election but even if they don't, the target expats for the international schools are the high earners (after all, if you have 2 kids and have to pay $60,000 a year in total school fees, you will only relocate to Singapore if your company pays you well) and these high earners have high positions in foreign companies that the govt will want to support. Where I think the govt is likely to clamp down is on PMEs directly competing with many Singaporeans.
4. Higher supply of new schools (Dulwich and GEMS last year plus the govt is seeking tenders for additional schools - if successful, these schools are likely to emerge after 3 years given that campuses have to be built).
I agree there is higher supply and that the high capacity utilisation and increases in fees cannot continue indefinitely. However, I do think that the analyst has overlooked the fact that (1) certain schools cater to specific markets (eg Singapore American School is very focused on US citizens with a US curriculum as opposed to IB and hence competes less directly with other schools, Australian school ditto and Dulwich and Tanglin are very focused on the English market) and (2) there are also smaller schools with poorer facilities (eg Nexus, Chinese International, Chatsworth, International Community School....) where parents typically move their kids onto bigger schools once they reach P3 - . Hence, some market share will be taken from these smaller schools.
5. Expats have smaller packages these days and hence there is pressure on them to seek cheaper alternatives (local schools or international schools in Johor).
I agree with this but there are still plenty of more well paid expats, that can afford the top international schools and wouldn't consider anything else.
6. OFS has now raised its fees to similar levels as other top schools (most of which only raised fees by 3% this year whereas OFS raised them by 10%), so future fee growth is likely to only be in the 2-3% range.
I agree with this assessment. As I have stated in previous posts, the key here is to get the capacity utilisation up from probably around 3,300ish (down from 3,700 - 3,800 at their Orchard campus) to the maximum capacity of 4,800. That is what will cause the big jump in revenues. If that doesn't happen, then growth closer to inflation rates is likely.
7. Earnings are likely to be flattish with a stable dividend due to increased depreciation charges as well as interest charges (upon completion of the campus, interest is no longer capitalised but will be expensed) although cash flow will grow nicely.
If you subscribe to the analyst's view that OFS is unlikely to be able to grow student numbers significantly, then this makes sense but if you see room for growth, then she is being too negative. The analyst's view is that cash flow will grow nicely but is likely to be conserved to pay off the $150MM bond maturing in 2019 and hence an increase in dividends is unlikely in the near future. I guess this all depends whether the company wants to end up debt free or is happy to have a bit of debt outstanding, in which case it could increase the dividend.
Valuation wise, if the company is throwing off a lot of cash with small capex requirements, it also begs the question whether the market will use earnings or EBITDA multiples to value the stock.....
So, in conclusion, I think the analyst has done a good job highlighting the various things that could go wrong. I just don't agree with her that they will
. The key points for this stock is really whether you believe (1) that there is still sufficient overall demand in the market to fill up these schools (given new capacity from Dulwich, GEMs and OFS) and (2) that Pasir Ris is not so off the beaten track that OFS (which has a long track record as a school in Singapore) can still increase enrolment to 4,800.Vested in bonds and shares.