Overseas Education Limited

[GenS70]

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.

This is something to find out, maybe ask during the forthcoming AGM?

What I can share is teachers, the academic ones are expatriates and they are all on 2 year contracts, this is the flexibility of their business model that allows Overseas Edu to manage their affairs well during the 5 years of sharp decline in student enrollment

Along with flexibility there is likely negatives for us to find out?

[dydx]

My simple conclusion: We have in OEL a proven cash flow generation under the present management, and going forward this cash flow generation has the potential to grow as the operation of the school now based in Pasir Ris has gone through gestation and still has substantial capacity which can be filled through increased marketing. OEL is now properly financed at least in the next 9+ years, and any increase in cash flow generation would go to retiring OCBC's term loan faster or higher dividends, or both. Meanwhile, shareholders can continue to enjoy steady good yearly dividends while waiting for the controlling shareholders (both in retirement age) to realise the full value of this business through a potential trade sale.

[karlmarx]

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).

Yes, right now, OEL shareholders are "paid to wait." But as you have acknowledged, it is not certain, or even highly probable, that OEL's revenue situation will improve, as shareholders are waiting. It could be better, or it could be worse. 

It will be dangerous to assume that it can only do better, not worse.

The point about OEL enjoying operating leverage when it is operating at close to capacity has been repeated numerous times, in this thread, over the past years. This same idea can be applied to most businesses with large overhead, such as Straco. So before we consider how much OEL can potentially enjoy if it is operating close to capacity, the foremost question to ask is whether it can attract higher enrollments. Or in the case of Straco, tourists.

This being the case, the practical thing to do would be to study the factors which may lead to better/worse revenue, to be better informed on the probability of either occurrence.

[karlmarx]

My simple conclusion: We have in OEL a proven cash flow generation under the present management, and going forward this cash flow generation has the potential to grow as the operation of the school now based in Pasir Ris has gone through gestation and still has substantial capacity which can be filled through increased marketing. OEL is now properly financed at least in the next 9+ years, and any increase in cash flow generation would go to retiring OCBC's term loan faster or higher dividends, or both. Meanwhile, shareholders can continue to enjoy steady good yearly dividends while waiting for the controlling shareholders (both in retirement age) to realise the full value of this business through a potential trade sale.

OEL's situation is not new. Numerous companies have in the past had their dividends cut, in spite of being recognised to be "a proven cash flow generator." The obvious ones being SPH, M1/Starhub, and HPHT. For the past to be relied upon as a guide for the future, the future has to be unchanging. Will the competitive landscape of international schools be more or less competitive in the future?

OEL has tried increasing its marketing in the past years, and I'm sure they still do. For now, the effects of such marketing initiatives has not had a positive impact on enrollment. So why should investors believe that their future marketing efforts will be any better, vis-a-vis the competitors?

The privatisation card is also something that can be played for every other listed company. But what are the reasons that OEL will be privatised?

A buyer of OEL not only has to pay for its equity, but also its debt. 

As previously mentioned, OEL's EV/EBITDA is at least 10x; the kind of valuation where companies are sold to public, not bought from the public. Given its present profit or EBITDA levels, the price of OEL shares has to be severely marked down, if they are to be sold.

Price aside, unless the buyer is also a for-profit education outfit, the buyer will need someone to run the school. If long-time operators DAP and WLH are retiring, then who will a buyer have to lead the teaching faculty, which is the basis of a school's competitive advantage?

Based on the fact that the controlling shareholders -- DAP and WLH -- who are also BOD members, are paying dividends out of depreciation and stretching its loan repayment schedule as far as possible, it look to me that the monetisation of OEL's future value is already in progress.

[GenS70]

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).

Yes, right now, OEL shareholders are "paid to wait." But as you have acknowledged, it is not certain, or even highly probable, that OEL's revenue situation will improve, as shareholders are waiting. It could be better, or it could be worse. 

It will be dangerous to assume that it can only do better, not worse.

The point about OEL enjoying operating leverage when it is operating at close to capacity has been repeated numerous times, in this thread, over the past years. This same idea can be applied to most businesses with large overhead, such as Straco. So before we consider how much OEL can potentially enjoy if it is operating close to capacity, the foremost question to ask is whether it can attract higher enrollments. Or in the case of Straco, tourists.

This being the case, the practical thing to do would be to study the factors which may lead to better/worse revenue, to be better informed on the probability of either occurrence.

thank you for the robust discussion

one definitely has to look at Overseas edu from a probabilisitic perspective, definitely not from a binary one like can it or can it not, and along with the probabilistic analysis one can decide if there are enough margin of safety

[dydx]

Just to share some material old docs -

1) OEL was listed in Feb13 sponsored by UOB. The IPO involved the issuance of 150.0m new shares (including 25.0m under over-allotment due to strong demand) at $0.48/share, raising $72.0m in gross proceeds (net proceeds: $68.034m) to part-finance the total development cost of the new school campus located in Pasir Ris. The IPO was very well received, partly because OEL stated its dividend policy upfront that the company intends to pay dividends of at least 50.0% of net profit after tax for each financial year...
https://oel.listedcompany.com/misc/ar/Ipo.pdf [IPO prospectus]
https://oel.listedcompany.com/newsroom/P..._2013).pdf [IPO launch press release]
https://oel.listedcompany.com/newsroom/2...D41E.1.pdf [IPO close press release]

2) Soon after IPO, OEL secured the 30-year leasehold land (area: 49,8664.8 sq.m.) in Pasir Ris from SLA for $28.0m in land premium, plus an additional $9.1m in land premium later for intensified land use. It is to be noted that the total of $37.1m in land premiums was not funded by the above IPO proceeds, but specifically from the $60.0m set aside from past distributable profits to fund the acquisition of the land and the construction of the new school campus... https://oel.listedcompany.com/newsroom/2...F4C0.1.pdf [14Jun13 announcement]
https://oel.listedcompany.com/newsroom/2...029E.1.pdf [13Sep03 announcement]

3) The construction of the new school campus was awarded to Woh Hup at a contract price of $233.508m...
https://oel.listedcompany.com/newsroom/2...1139.1.pdf [10Sep03 announcement]

4) The total development cost of the new school campus in Pasir Ris amounted to $270.6m was part-financed by a 5.20% $150.0m 5-year bond arranged by UOB which closed on 17Apr14...
https://oel.listedcompany.com/newsroom/2...UQWH.1.pdf [10Apr14 announcement]
https://oel.listedcompany.com/newsroom/2...2NPA.1.pdf [14Apr14 announcement]

Fast forward, based on the latest FY19 result and B/S as at 31Dec19, OEL's school PPE assets have a depreciated total BV of $249.7m, and the 5.20% $150.m 5-year bonds (matured 17Apr19) has been duly refinanced by a 10-year bilateral term loan from OCBC with an current outstanding of $113.58m at current interest rate of 3.4%p.a.

Just based on the above development process and business evolution, I think OEL has done very well! How much is the business worth? Just based on replacement cost of the school campus in Pasir Ris alone, it would be $270.0m without counting the supporting debts. Of course, we should also value the recurrent operating free cash flow.

[holymage]

Karlmarx raised several excellent points, especially on future prospects and depreciating expenses as a real cost. This reminds me of FSL Trust.

For each investment case, there are a few key questions that the investor must answer to complete 90% of his analysis. In the case of Overseas Education Limited, the question would be whether Overseas Family School will be able to increase or even sustain its enrollment numbers. This is not an easy question to answer. The focus should not be on dividends or dividend yield.

[GenS70]

Karlmarx raised several excellent points, especially on future prospects and depreciating expenses as a real cost. This reminds me of FSL Trust.

For each investment case, there are a few key questions that the investor must answer to complete 90% of his analysis. In the case of Overseas Education Limited, the question would be whether Overseas Family School will be able to increase or even sustain its enrollment numbers. This is not an easy question to answer. The focus should not be on dividends or dividend yield.

indeed, investment is never easy! what sometimes look easy is also not easy

[Bibi]

https://smiletutor.sg/international-priv...p-10-list/

Well at least OEL is inside the top 10 list. At position 9.

[dydx]

OFS website..
https://www.ofs.edu.sg/
https://g.page/overseas-family-school?share