Overseas Education Limited

[Bibi]

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

The 2.75c dividend doesnt seem sustainable against its full year eps of 1.9c.

[dydx]

The 2.75c dividend doesnt seem sustainable against its full year eps of 1.9c.

Please note that OEL has been paying out the yearly dividends from both its current year profit and past accumulated profits, which together stood at $66.524m as at 31Dec19. More importantly, OEL needs cash in order to pay the yearly dividends - $11.423m for the declared $0.0275/share final dividend for FY19 - and based on the $44.498m cash balance as at 31Dec19, it is not an issue at all.

Actually, as a proven and stable business generating predictable free cash flow from operation, OEL has been applying its operating cash surplus every year (FY19: in excess of $18.0m aftertax, or $0.043/share) to pay dividend, pay for recurrent replacement capex (approx. $1.5m p.a.), and reduce its long term debts. This pattern should continue.
https://links.sgx.com/FileOpen/OEL%20FY%...eID=596358 [OEL's FY19 results]

[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

The 2.75c dividend doesnt seem sustainable against its full year eps of 1.9c.

This is the most misunderstood part about Overseas Edu

Most of us think about eps and PE, however the more useful valuation methodology is actually DCF, why so? Because cash is the real stuff, try to think along cashflow perspectives for overseas edu, then it allows us to better understand this company that had already incurred the huge capex upfront and no meaningful capex for foreseeable future

[angelzsoul]

Hi guys,

https://links.sgx.com/FileOpen/OEL%20FY%...eID=596358

According to their FS,

1b(ii) Aggregate amount of Group's borrowings and debt securities
        (1) Bank Loan

"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. Any amount of the loan outstanding at the end of 10-year term is available for further refinancing"

1.54m * 4 quarters * 10 yrs = 61.6m < 117.75m

did I miss anything out?
Thanks in advance.

[dydx]

"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. Any amount of the loan outstanding at the end of 10-year term is available for further refinancing"

1.54m * 4 quarters * 10 yrs = 61.6m < 117.75m

did I miss anything out?
Thanks in advance.

Well, I suppose as a conservative/prudent borrower, OEL committed to the repayment schedule of $1.54m/quarter only after serious consideration. From the accounts over the years, we can discern that OEL has always kept an extra few million dollars as cash reserve, and only borrows under the term loan now (previously only under the $150m bond). I suppose OCBC as the sole lender under the $117.75m 10-year term loan facility has done their home work too, including detailed cash flow projections of OEL's OFS school operation into the distant future, before agreeing to the repayment schedule. In the event of an unexpected temporary cash flow shortfall from OFS in the future, OEL can always sit down with OCBC to make a small adjustment to the term loan repayment schedule. When compared with the previous bond issue, this is an extra advantage OEL enjoys now under the term loan facility, in addition to a lower interest rate. If OFS is able to do much better in the future, I suppose it is also reasonable to expect OEL to pay down the term loan faster than plan.

[AQ.]

"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. Any amount of the loan outstanding at the end of 10-year term is available for further refinancing"

1.54m * 4 quarters * 10 yrs = 61.6m < 117.75m

did I miss anything out?
Thanks in advance.

The bold part answers ur question.

Quite a good deal with OCBC, imo, esp on an unsecured basis.

[weijian]

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

The 2.75c dividend doesnt seem sustainable against its full year eps of 1.9c.

This is the most misunderstood part about Overseas Edu

Most of us think about eps and PE, however the more useful valuation methodology is actually DCF, why so? Because cash is the real stuff, try to think along cashflow perspectives for overseas edu, then it allows us to better understand this company that had already incurred the huge capex upfront and no meaningful capex for foreseeable future

Overseas Education reminds me to be a little like Straco - in a sense that it builds a fixed asset (high capex) and then has high FCF as maint capex is generally much lower than the fixed capex. The quality of the earnings is generally good because parents pay on schedule/ahead of time and so there is no issues with receivables.

So it has a certain degree of operating leverage - which we know cuts both ways. We also know which are the "forward looking indicators" to check out for - competition, no. of expats (working permits) or the attractiveness of Spore as an AP regional HQ etc..

[karlmarx]

Q1) How much 'free cash flow' does OEL have, after making payments for taxes, bank loan principal and interest payments, and capital expenditure?

OEL's loan is $6.16m a year, plus interest. So I assume $6.16m is principal repayment. Assuming interest of 3.5% and principal of $110m, its first year bank repayment will amount to about $10m, and lower as principal reduces in the later years, assuming interest rates do not change.

Using OEL's FY19 results, assuming that major items such as revenue and operating expenses remain the same, let's try to project FY20's cashflow:

Profit before depreciation and amortisation: $24m

(Less) Lease expense (SFRS16) adjustment: $3m

Adjusted profit before depreciation and amortisation: $21m

(add) Finance cost: $5m

Profit before depreciation and amortisation, and loan principal and interest payment: $26m

(Less) Taxes: $2.5m

Profit before depcreication and amortisation, loan principal and interest payment, but after tax: $23.5m

(Less) Loan principal and interest payment: $10m (as illustrated above)

Profit before depcreication and amortisation, after tax and bank repayments: $13.5m

(Less) Capital expenditure: $1m

Profit before depcreication and amortisation, after tax, bank repayments, and capital expenditure (i.e. FCF): $12.5m

(Less) Dividends: $11.5m

Balance: $1m

Assuming that revenue, cost items, interest rates, and capital expenditure remain the same, then yes, OEL can maintain its present dividends, and with some spare change. 

But it should be clear from the rudimentary calculations that the cashflow to maintain dividends is tight, and has little tolerance for negative impacts.

Whether such cashflow projections can become reality will depend on how much revenue, costs, interest rates, and capital expenditures change.

OEL's operating performance has been stable for the past 3 years, so it will not be a stretch to expect that FY20 results will be similar to FY19.

What about FY21 and beyond?


Q2) Is 'free cash flow' more important than net profits, when considering the attractiveness of OEL?

The reason that companies are required to report net profit, and not FCF or EBITDA, is to recognise the cost of replacing a business' PPE. Unless a business' PPE does not in reality depreciate, then the depreciation expenses can be ignored. But for OEL, this is not the case.

The lease for the land on which its campus sits on runs for 30 years, from 2013 to 2043. OEL paid about $35m for the lease. Now that it is 2020, there is about 23 years left on the lease. After the lease expires, OEL will need to pay to renew the lease. And it will certainly be higher, due to inflation.

The other major PPE is the building, which OEL believes can be used for 50 years. Structurally, modern buildings should have no problem to remain standing after 50 years. But to expect no major capital expenditure for a school building, is not realistic, especially if Overseas Family School wishes to remain competitive to other (premier) private schools, and particularly towards the end of the land's 30 year lease.

For now, the building remains relatively new, and no heavy capex should be expected in the next 5-10 years. But as the years run down, the replacements needed will go up. 

Since OEL is paying out as much dividends as it possibly can, it is not building its cash reserves, and only has a small cash reserve ($15m) to fund future capex and lease renewal. 

Assuming that OEL's financial policies do not change, OEL will either need to (again) take on debt and/or issue shares, when it is time to renew the lease and replace major PPE. 

How much will lease renewal and capex be? Probably not a question most feel a need to answer, since the event is still 23 years away.

The implication is that OEL is rewarding present shareholders at the expense of future shareholders. 

OEL's capex and cashflow may look similar to Straco, but its debt repayment and dividend policies look more similar to the shipping trusts of yesteryear. 


Q3) What is the significance of OEL's $45m cash balance in relation to its ability to pay dividends?

OEL has $45m of cash but most of these are from student fees it received in advanced -- amounting to $30m -- which will be required to satisfy operating expenses. 

Hence, OEL's 'own' cash balance is more like $15m; only slightly more than a year's dividends. 

Can OEL use students fees it received in advance to pay dividends? Sure. But you can imagine the effect that will have on student enrollment, and the school's ability to remain as a going concern. 

Since OEL is running a very tight cashflow just to maintain its dividends, if, for whatever reason, its cashflows are materially reduced, it will only have a year's of dividends in its 'reserves.' 


Q4) Since OEL is running such a tight cashflow to maintain dividends, what can possibly reduce the cashflow?

It has been noted that OEL's revenues is the most important consideration to its future prospects. Indeed, all of the concerns presented above -- tight cashflow, low cash balance, asset renewal -- will be ameliorated if the revenues are growing, since that will likely boost profits and cashflow.

As such, (prospective) investors should probably spend more time studying the future prospects of OFS' business.

In the competitive landscape, OFS does not belong to the 'top tier' of international school, such as SAS, SAIS, CIS, and UWC, where, there are usually wait lists for enrollment. OFS has been around for a long time. It may be good, but it certainly doesn't have the cachet -- like those mentioned -- to be considered great. 

And so it will probably be a mistake to think that OFS belong to, and so only competes with, the few top tier names. It looks more probable that OFS competes with plenty of other 'second tier' schools, of varying sizes, and each with their own brand/quality/USP/price proposition. I do not have insight into OFS' competitive position as I have not done any research in this area. For those interested, the expat forums are probably a good place to start. 

Part of the reason for OEL's improved profits over the past years has been its reduction in staff numbers, from 500 in 2014 to 400 in 2019. Whether this affects OFS's teaching quality, and hence, its long-term competitive position, is also something to ponder about.

As I understand, the interest rate of OEL's bank loans are not fixed, which means it is subject to market forces. I have no insight on future interest rates, but this is another factor to consider.


Q5) If OEL is indeed rewarding present shareholders at the expense of future shareholders, what may be the possible reason for this?

The prudent financial policy will have been for OEL to be more aggressive in reducing its loan. From its current arrangement with OCBC, and assuming that a similar arrangement is extended after the present one expires in 10 years, OEL can comfortably stretch the repayment of its loan until near the expiry of its lease.

Why are they not in a hurry to pay down the loan?

David Alan Perry will be 79 this year, and Wong Lok Hiong will be 66. These two largest shareholders own 63% of the company. In 10 years time, after the current loan arrangement ends, and PPE replacements loom larger, they will be 89 and 76, respectively.

The current loan arrangement may be good for OEL, but I do not see how it can be favourable for OCBC.

By the time the lease on the Pasir Ris campus is close to expiry, the question of whether either of them -- as executives and/or shareholders -- will still be with the company is yet another question for investors. Wong does have a daughter on the company's payroll, so she could possibly be the one to deal with future lease, capex and going-concern issues.

For now, the long remaining lease will mean most investors may enjoy the rich dividends, together with DAP and WLH, well before major fund raising exercises in the very far future.

[Bibi]

Just browse thru 2019 annual report which mention not only teachers and staff number hv declined, but individual salaries have remained unchanged for 3 years. Unless they have been paid too highly in the first place else I am not sure if quality staff will want to remain there.

[GenS70]

Q1) How much 'free cash flow' does OEL have, after making payments for taxes, bank loan principal and interest payments, and capital expenditure?

OEL's loan is $6.16m a year, plus interest. So I assume $6.16m is principal repayment. Assuming interest of 3.5% and principal of $110m, its first year bank repayment will amount to about $10m, and lower as principal reduces in the later years, assuming interest rates do not change.

Using OEL's FY19 results, assuming that major items such as revenue and operating expenses remain the same, let's try to project FY20's cashflow:

Profit before depreciation and amortisation: $24m

(Less) Lease expense (SFRS16) adjustment: $3m

Adjusted profit before depreciation and amortisation: $21m

(add) Finance cost: $5m

Profit before depreciation and amortisation, and loan principal and interest payment: $26m

(Less) Taxes: $2.5m

Profit before depcreication and amortisation, loan principal and interest payment, but after tax: $23.5m

(Less) Loan principal and interest payment: $10m (as illustrated above)

Profit before depcreication and amortisation, after tax and bank repayments: $13.5m

(Less) Capital expenditure: $1m

Profit before depcreication and amortisation, after tax, bank repayments, and capital expenditure (i.e. FCF): $12.5m

(Less) Dividends: $11.5m

Balance: $1m

Assuming that revenue, cost items, interest rates, and capital expenditure remain the same, then yes, OEL can maintain its present dividends, and with some spare change. 

But it should be clear from the rudimentary calculations that the cashflow to maintain dividends is tight, and has little tolerance for negative impacts.

Whether such cashflow projections can become reality will depend on how much revenue, costs, interest rates, and capital expenditures change.

OEL's operating performance has been stable for the past 3 years, so it will not be a stretch to expect that FY20 results will be similar to FY19.

What about FY21 and beyond?


Q2) Is 'free cash flow' more important than net profits, when considering the attractiveness of OEL?

The reason that companies are required to report net profit, and not FCF or EBITDA, is to recognise the cost of replacing a business' PPE. Unless a business' PPE does not in reality depreciate, then the depreciation expenses can be ignored. But for OEL, this is not the case.

The lease for the land on which its campus sits on runs for 30 years, from 2013 to 2043. OEL paid about $35m for the lease. Now that it is 2020, there is about 23 years left on the lease. After the lease expires, OEL will need to pay to renew the lease. And it will certainly be higher, due to inflation.

The other major PPE is the building, which OEL believes can be used for 50 years. Structurally, modern buildings should have no problem to remain standing after 50 years. But to expect no major capital expenditure for a school building, is not realistic, especially if Overseas Family School wishes to remain competitive to other (premier) private schools, and particularly towards the end of the land's 30 year lease.

For now, the building remains relatively new, and no heavy capex should be expected in the next 5-10 years. But as the years run down, the replacements needed will go up. 

Since OEL is paying out as much dividends as it possibly can, it is not building its cash reserves, and only has a small cash reserve ($15m) to fund future capex and lease renewal. 

Assuming that OEL's financial policies do not change, OEL will either need to (again) take on debt and/or issue shares, when it is time to renew the lease and replace major PPE. 

How much will lease renewal and capex be? Probably not a question most feel a need to answer, since the event is still 23 years away.

The implication is that OEL is rewarding present shareholders at the expense of future shareholders. 

OEL's capex and cashflow may look similar to Straco, but its debt repayment and dividend policies look more similar to the shipping trusts of yesteryear. 


Q3) What is the significance of OEL's $45m cash balance in relation to its ability to pay dividends?

OEL has $45m of cash but most of these are from student fees it received in advanced -- amounting to $30m -- which will be required to satisfy operating expenses. 

Hence, OEL's 'own' cash balance is more like $15m; only slightly more than a year's dividends. 

Can OEL use students fees it received in advance to pay dividends? Sure. But you can imagine the effect that will have on student enrollment, and the school's ability to remain as a going concern. 

Since OEL is running a very tight cashflow just to maintain its dividends, if, for whatever reason, its cashflows are materially reduced, it will only have a year's of dividends in its 'reserves.' 


Q4) Since OEL is running such a tight cashflow to maintain dividends, what can possibly reduce the cashflow?

It has been noted that OEL's revenues is the most important consideration to its future prospects. Indeed, all of the concerns presented above -- tight cashflow, low cash balance, asset renewal -- will be ameliorated if the revenues are growing, since that will likely boost profits and cashflow.

As such, (prospective) investors should probably spend more time studying the future prospects of OFS' business.

In the competitive landscape, OFS does not belong to the 'top tier' of international school, such as SAS, SAIS, CIS, and UWC, where, there are usually wait lists for enrollment. OFS has been around for a long time. It may be good, but it certainly doesn't have the cachet -- like those mentioned -- to be considered great. 

And so it will probably be a mistake to think that OFS belong to, and so only competes with, the few top tier names. It looks more probable that OFS competes with plenty of other 'second tier' schools, of varying sizes, and each with their own brand/quality/USP/price proposition. I do not have insight into OFS' competitive position as I have not done any research in this area. For those interested, the expat forums are probably a good place to start. 

Part of the reason for OEL's improved profits over the past years has been its reduction in staff numbers, from 500 in 2014 to 400 in 2019. Whether this affects OFS's teaching quality, and hence, its long-term competitive position, is also something to ponder about.

As I understand, the interest rate of OEL's bank loans are not fixed, which means it is subject to market forces. I have no insight on future interest rates, but this is another factor to consider.


Q5) If OEL is indeed rewarding present shareholders at the expense of future shareholders, what may be the possible reason for this?

The prudent financial policy will have been for OEL to be more aggressive in reducing its loan. From its current arrangement with OCBC, and assuming that a similar arrangement is extended after the present one expires in 10 years, OEL can comfortably stretch the repayment of its loan until near the expiry of its lease.

Why are they not in a hurry to pay down the loan?

David Alan Perry will be 79 this year, and Wong Lok Hiong will be 66. These two largest shareholders own 63% of the company. In 10 years time, after the current loan arrangement ends, and PPE replacements loom larger, they will be 89 and 76, respectively.

The current loan arrangement may be good for OEL, but I do not see how it can be favourable for OCBC.

By the time the lease on the Pasir Ris campus is close to expiry, the question of whether either of them -- as executives and/or shareholders -- will still be with the company is yet another question for investors. Wong does have a daughter on the company's payroll, so she could possibly be the one to deal with future lease, capex and going-concern issues.

For now, the long remaining lease will mean most investors may enjoy the rich dividends, together with DAP and WLH, well before major fund raising exercises in the very far future.

Kudos to you for bringing up very valid points helping investors learning better about Overseas edu!

On the issue of cash flow, I like to highlight that it may not be as tight as it appears, one can certainly look into the details and consider the scenarios and options Overseas Edu has, further to that, ocbc is offering them an unsecured 10 year term loan, quite unheard of in SGX, but I stand to be corrected so pls let me know if I m wrong, that only mean that Overseas Edu is not at the losing end of the bargaining table, they could hv structure it this way to minimize their overall all in debt cost with the confidence they are able to handle it.

Next, it is true about the future material cash flow, but this I will appeal to one to do up a DCF, one will then realize that anything beyond 20 years once it is discounted back to present, it does not move the needle much, but the concern is indeed fair and one will be better served by looking at various scenarios for the DCF analysis.

Personally I am not exactly a yield guy, I like Overseas Edu yield then ard 30c and even now, but what I like even more is the optionality to me as an equity investor. The school is only half full, so there is a lot of operating leverage, as I am paid to wait for an eventual upturn to its school enrollment (am I foolhardy or wishful thinking considering that there is a slight uptick or stabilization in student enrollment after 5 years of sharp decline, during which the school is able to manage its affairs well).