Overseas Education Limited

[karlmarx]

Increasing capacity in the private education industry coupled with a slow-to-no growing economy. It is going to be even more challenging for Overseas Education.

[level13]

More and more competition.

http://www.todayonline.com/singapore/no-...ous-expats

Is OEL willing to drop the student fee per annum to remain relevant?

[cyclone]

87,400 / 230,000 = 0.38

On 21 April 2017, Saray Developed Markets Value Fund boosted stake by acquiring additional 230,000 shares for a consideration of S$87,400.

[karlmarx]

Revenue continues to trend lower (6.9% vs 1Q16) but profits inched slightly as expenses such as salaries/headcount was reduced (6.6% vs 1Q16). Balance sheet remains largely unchanged.

After more than a year of cost cutting, I believe there isn't much left to cut without seriously affecting the quality of education. A positive school environment, depends to a large part, having satisfied teaching staff.

Comparing 1Q14 -- before its move to the Pasir Ris campus -- with 1Q17, revenue fell while expenses rose:

1Q14 Revenue: $25.4m Expenses: $17.8m + $1m (depreciation) = $18.8m
1Q17 Revenue: $22.0m Expenses: $17.4m + $2.6m (depreciation) = $20.0m

http://infopub.sgx.com/FileOpen/OEL_Fina...eID=452731

http://infopub.sgx.com/FileOpen/OEL_1Q%2...eID=296391

Yet, competition continues to intensify in the international schools market. International schools continue to setup shop in Singapore, the more recent ones being Dulwich College and GEMS World Academy. As of 2016, there were 86 international schools in Singapore. Smaller players such as Middleton and Invictus have muscled in to offer cost-conscious expats more affordable options and are charging fees of $15k-$20k a year, which is half to a third cheaper than the full campus schools.

http://www.todayonline.com/singapore/no-...ous-expats

It should also be noted that the demand for quality education comes not only from the expat community working in Singapore, but also from the nouveau riche or elite families in our neighbouring countries. But some of this demand has shifted away as the international school locate themselves closer to their customers in Malaysia and Thailand, which means fewer of the wealthy Malaysian and Thai students may be coming to Singapore.

http://www.asiaone.com/singapore/interna...ll-growing

As if departing expats and increasing number of operators (in and around Singapore) isn't bad enough, there seems to be a plan to introduce more lower cost operators. This is probably part of Singapore's continued efforts to attract businesses and investments, by providing their expat workforce with affordable education. And they are planning to do that by leasing presently-unused school premises to international school operators. The short lease term also allows the operators to test the market before making bigger commitments; no need to spend a hundred million to lease lend and construct new buildings. With an increasing number of unused school premises from the merger of school, there shall be plenty of space available for interested operators.

http://www.channelnewsasia.com/news/sing...at-8735252

Back to OFS' balance sheet, the biggest concern remains the refinancing of its bonds worth $143m in April 2019. Extrapolating its current profitability, it is unlikely that it will be able to earn enough to redeem the bonds fully. It is also unlikely that it will issue (sufficient) equity due to the low share price, and since the two major shareholders hold a combined 64%, they will have to fork out a very large sum if they do so. Therefore, OFS may likely issue more bonds, and since its business isn't doing as well as when it first issued its 5.2% bonds in April 2014, it may have to issue at a higher coupon rate, which may continue to compress its margins.

[karlmarx]

The competition for international students continues to heat up:

'Fees will be 40% cheaper compared with similar schools; classes begin next January'

'A new international school charging lower fees will open in January next year to cater to demand from expatriates looking for cheaper options.

One World International School (OWIS) will start a new Nanyang campus at 21, Jurong West Street 81, for students aged three to 18.

In a statement yesterday, OWIS said it will invest more than $10 million in the campus, which will be able to take in 1,200 students.'

http://www.straitstimes.com/singapore/ed...lower-fees

Closer to OFS, construction of the Global Indian International School is well underway...

[karlmarx]

Business continues to be challenging at OEL as revenue shrinks 7.6% for 2Q17 when compared to 2Q16:

http://infopub.sgx.com/FileOpen/OEL_Fina...eID=466670

But when compared to 1Q17, revenue has stabilized.

Extrapolating its HY17 results for the entire year, profits may come in at about $5m - $7m.

Its April 2019 bonds -- where there are still $135m outstanding -- were still selling at a premium, and its market cap is about $153m. So at current prices, a buyer of OEL will be paying a total of about $288m.

[GreedandFear]

I have exited this position at a loss and thought it would be useful to reflect upon why I invested and subsequently why I exited.

Investment Rationale.
1. Long established international school with a good (although not outstanding) reputation
2. Founders of the school continue to be the majority shareholders  - they have skin in the game
3. Existing top tier schools (SAS, UWC, Tanglin) were full and new top tier schools (Stamford and Dulwich) filled up quickly, suggesting that there was good demand / room to grow
4. Historically, outstanding profit margins (net profit = 20%)
5. Good cash flow generating business (school fees are paid in advance, so positive cash flow)
6. The move to the Pasir Riis campus would increase capacity by 50%

Investment Concerns.
The major concern was how many students would leave as a result of the move to the new campus, how quickly they could be replaced and how quickly the new extra capacity (around 1,000 extra students from memory) could be filled. 
A few years before, UWC had successfully opened a new campus in Tampines and hence there seemed to be demand for international schools in the East

What happened
1. More students were lost than expected. I had underestimated how many students were attracted to OFS due mainly to its old Orchard campus.
2. The Oil and Gas turmoil caused a lot of expats in that industry to leave
3. The school has never been able to recover the lost students nor fill its new capacity

Why have I exited ?
As the local and global economy is recovering, you would expect international schools to benefit as well and hence it would make sense to hang on to the investment and wait for the excess capacity to be gradually filled. However, the education landscape has changed :

1. A number of the smaller 2nd tier schools are building newer and bigger campuses (eg Nexus, German European School) so there will be more competition
2. Top and 2nd tier international schools charge in the region of $33-35,000 tuition per year. This is increasingly out of reach for many expat families. As a result, a number of new "no frills" international schools have opened / are planning to open (eg one run by Eton House) which are aiming at tuition fees in the $20,000 range which will appeal to many parents who do not get tuition covered by their expat package.
3. Increasingly expats view Singapore schools as a good alternative but, anecdotically, it appears that MoE is making it more difficult for foreigners to get places in order to not create more competition for Singaporean students.

So, whilst I think that the school is well run, the majority shareholders have skin in the game and, lately, they have really tried to cut costs, the competitive landscape has changed with more places available and cheaper alternatives available. Hence, I find it difficult to predict any imminent recovery and I think that the school needs to rethink its strategy. Probably by cutting fees and repositioning itself somewhere between the premium schools ($35,000 fees) and the new "no frills" schools ($20,0000 fees). It is a high fixed cost business and capacity needs to be filled in order to maximise profits.

NO LONGER VESTED

[weijian]

hi GreedandFear,

Thanks for sharing. It is cognitively hard to admit mistakes in an online setting but you have done it.

With your post, I read through the entire OEL thread again. I realize actually most forumers (including you) have already seen the points you mentioned under "Why have i exited?". There were people in both sides of the camp - so really i think it is interesting that people look at the same thing, but see it differently.

[karlmarx]

Kind of late, but I have just taken a look at OEL's FY17 results and realised that they are maintaining dividends at $0.0275 per share. Here is OEL's dividend history from publicly available data:

FY11: $3,000
(IPO) FY12: $8,000
FY13: $11,422
FY14: $11,422
FY15: $17,133
FY16: $8,567
FY17: $8,567

Total: $76,111

At around the time before it IPO, OEL must have known that it will require a huge sum of money to develop a new campus. If it only paid out a third of all these dividends, the refinancing risk it presently face will be negligible.

I am surprised that dividends are still maintained, and at a level that is well above its profits. Perhaps OEL is intending to issue new shares, hence the need to maintain share price. Or perhaps management has an optimistic view of future enrollment and cash flow.

Or perhaps they just need the cash? Otherwise, how can they still be paying themselves more, while the business is earning less?

Key management compensation
FY12: $2,590
FY13: $3,079
FY14: $3,312
FY15: $3,290
FY16: $3,389

http://infopub.sgx.com/FileOpen/OEL_Fina...eID=488862

[cyclone]

Request for Trading Halt : Pending release of announcement.