Overseas Education Limited

[GreedandFear]

The key number to look at is registration fees. All new students pay an upfront registration fee. That number gives you an indication of whether new student numbers are increasing or flat. In this case, it is flat. My guess is that the revenue number is slightly up because tuition fees have increased (as has been the case across most big international schools). They have done a good job cutting costs and finance costs but the school is operating way below capacity. The company needs to grow student numbers to increase profits. If they cut teachers' salaries, the quality of teachers will suffer and students will leave for other international schools.

[dydx]

The key number to look at is registration fees. All new students pay an upfront registration fee. That number gives you an indication of whether new student numbers are increasing or flat. In this case, it is flat. My guess is that the revenue number is slightly up because tuition fees have increased (as has been the case across most big international schools). They have done a good job cutting costs and finance costs but the school is operating way below capacity. The company needs to grow student numbers to increase profits. If they cut teachers' salaries, the quality of teachers will suffer and students will leave for other international schools.

Please note per OEL's accounting policies, registration fees received are prorated over the estimated average student life in the school. Below extracted from the FY18 AR, p77..

Registration fees 
The Group previously recorded registration fee at the date when the student’s application is accepted by the school. Under SFRS(I) 15, registration fee is recognised over the estimated average student life in the school.

[AQ.]

Under Pt 1b)

"An unsecured 10-year bank term loan facility of $117.75 million was utilised to fully redeem the remaining outstanding Company's Bonds of $117.75 million on 17 Apr 2019. The bank loan shall be repaid in quarterly instalments of $1.54 million per quarter, and interest calculated at the prevailing bank's offer interest rate on the outstanding loan balance. The first quarterly instalment of $1.54 million and interest of $1.08 million, totalled $2.62 million, was paid in Q3 2019."

=> This works out to be ard 3.8% in interest rates, vs 5.2% for their previous bond.

[dydx]

Under Pt 1b)

"An unsecured 10-year bank term loan facility of $117.75 million was utilised to fully redeem the remaining outstanding Company's Bonds of $117.75 million on 17 Apr 2019. The bank loan shall be repaid in quarterly instalments of $1.54 million per quarter, and interest calculated at the prevailing bank's offer interest rate on the outstanding loan balance. The first quarterly instalment of $1.54 million and interest of $1.08 million, totalled $2.62 million, was paid in Q3 2019."

=> This works out to be ard 3.8% in interest rates, vs 5.2% for their previous bond.

I assume the new term loan carries a floating interest rate pegged to a certain market SGD cost-of-fund reference rate, and OEL may fix the borrowing cost or convert it to a fixed-rate by way of a separate interest rate swap transaction. Based on the $1.08m quarterly interest amount, my own calculation of the interest rate is 3.67%p.a. (4x1.08/117.75). Just as well, the all-in total borrowing cost under the previous bond should be more than the coupon rate of 5.2%p.a., as the bond should carry quite a big issuance cost which was paid upfront, and this cost item has to be prorated over the life of the bond.

Based on the 3Q P&L, savings on finance cost in 3Q vs. 3Q-FY18 was $699k ($1762k - $1063k). If we annualise this and adjust for the quarterly instalments of the new term loan, savings on finance cost could well be at least $2.5m a year for the next 12 months. I hope OEL would use the savings to increase the final dividend payment. Otherwise, the savings could be used to reduce the outstanding term loan balance.

[dzwm87]

De-leveraging works wonder on their P&L too. If they become a zero debt balance sheet, their earnings will effectively double. The wild card is on students registration because a decline will offset any interest expense cut and operating leverage hurts badly for OEL.

The fact is there is an oversupply of international schools and expat inflow has structurally changed. An investor needs to work out if this is of any asymmetric benefit or not.

Sent from my Pixel 2 using Tapatalk

[dydx]

De-leveraging works wonder on their P&L too. If they become a zero debt balance sheet, their earnings will effectively double. The wild card is on students registration because a decline will offset any interest expense cut and operating leverage hurts badly for OEL.

The fact is there is an oversupply of international schools and expat inflow has structurally changed. An investor needs to work out if this is of any asymmetric benefit or not.

Sent from my Pixel 2 using Tapatalk

OEL has been de-leveraging - having bought back $32.25m of the previous $150.0m bond during its 5-year term - ever since the new school premises was completed, and it is reasonable to expect the company to continue de-leveraging under the present $117.75m 10-year unsecured term loan from OCBC.

While the standards of some FSS's have fallen, OEL's OFS remains standing tall in reputation and quality, so we have a good product here. It just needs more marketing effort and time to recover to its previous glory (when the old school was sited near Orchard) and succeed. More expats and foreigners - including from HK - coming to work and live in SG will certainly help.

[dzwm87]

My sense is OFS is an "interim" FSS for the prestige names - i.e. parents who will enroll their kids while queuing for more prestige schools like SAS. So "churn" should be higher for OFS.

Gone are the old days of expat remunerations. I think it might be too aggressive to assume the industry will return to its good o'days.

[dydx]

Full-year results + final dividend (last FY: $0.0275/share) declaration should be out soon (last FY18 was released on 13Feb19). Perhaps it is timely to revisit the latest 3Q results and last FY18 full-year results..
https://links.sgx.com/FileOpen/OEL%20Fin...eID=585222 [FY19-3Q]
https://links.sgx.com/FileOpen/OEL_Finan...eID=543374 [FY18]

[GenS70]

full year result out on 13 Feb, 4Q number look stable vs previous quarter, dividend maintained at 2.75c yielding 7.5% at the latest price of $0.365

4Q tuition fees is stable and slightly higher than 3Q

note 3Q is the first time tuition fees arrest the year on year decline after 20 straight quarter (i.e. 5 years) of year on year decline, latest 4Q affirm that the new school year from Aug has brought overseas edu into an improved student enrolment environment

[dydx]

MOM's foreign workforce numbers show an increase in the number of Employment Pass holders since Dec2018...
https://www.mom.gov.sg/documents-and-pub...ce-numbers

Of course, not all Employment Pass holders have school going children in Singapore. As well, some foreigners with school going children in Singapore do not work or hold an Employment Pass, and some foreign students studying in Singapore may not have their parents working here.