Overseas Education Limited

[GreedandFear]

Overseas Education proposes to issue $150M worth of bond with coupon rate of 5.2% (due 2019) to fund the new campus.

http://infopub.sgx.com/FileOpen/OEL_Anno...eID=291031

What do fellow buddies think of this?

The interest is a bit higher than what I would have anticipated but, on the plus side, I believe that they should now be able to finance the new campus without any new issue of shares which is positive. There is increased completion within the sector with Stamford American's high school opening this summer, as well as campuses by Dulwich and Gems. However, OFS is a well-known brand so should continue to attract students. I like that it is a boring / stable business but the shares are not cheap....

[GreedandFear]

Overseas Education proposes to issue $150M worth of bond with coupon rate of 5.2% (due 2019) to fund the new campus.

http://infopub.sgx.com/FileOpen/OEL_Anno...eID=291031

What do fellow buddies think of this?

The interest is a bit higher than what I would have anticipated but, on the plus side, I believe that they should now be able to finance the new campus without any new issue of shares which is positive. There is increased completion within the sector with Stamford American's high school opening this summer, as well as campuses by Dulwich and Gems. However, OFS is a well-known brand so should continue to attract students. I like that it is a boring / stable business but the shares are not cheap....

Sorry, I think your question was focused on the bond rather than the shares....I like the bond, precisely because it is a boring, predictable business where parents have to pay fees in advance of each semester. I am long the bond and think there is value as long as you get it above 4 - 4.5% and you are willng to hold to maturity. It won't make you rich but I think it is a strong credit but probably not one that many investors know and hence they had to price it generously at 5.2%. Last I saw, the price was around 101.

(vested in the bond)

[Dividend Hermit]

Overseas Education proposes to issue $150M worth of bond with coupon rate of 5.2% (due 2019) to fund the new campus.

http://infopub.sgx.com/FileOpen/OEL_Anno...eID=291031

What do fellow buddies think of this?

The interest is a bit higher than what I would have anticipated but, on the plus side, I believe that they should now be able to finance the new campus without any new issue of shares which is positive. There is increased completion within the sector with Stamford American's high school opening this summer, as well as campuses by Dulwich and Gems. However, OFS is a well-known brand so should continue to attract students. I like that it is a boring / stable business but the shares are not cheap....

Sorry, I think your question was focused on the bond rather than the shares....I like the bond, precisely because it is a boring, predictable business where parents have to pay fees in advance of each semester. I am long the bond and think there is value as long as you get it above 4 - 4.5% and you are willng to hold to maturity. It won't make you rich but I think it is a strong credit but probably not one that many investors know and hence they had to price it generously at 5.2%. Last I saw, the price was around 101.

(vested in the bond)

Hi, thanks for your valuable inputs! I am thinking the bond looks more attractive than the shares. If they gonna pay annual coupon, their EPS and dividend (their policy is 50% POR) will decrease further until the new campus is completed. In that case, I should only be vested in the shares if I expect the price to increase substantially.

This is a good company and I am definitely interested. But I am mulling over the entry price and possible risks (competition from other schools, staff costs). Right now, as you said, the price is on the high side. Shall observe further as there are also other good companies but I only have limited funds to deploy.

[shawn_sass]

Overseas Family School's new campus at Pasir Ris TOP date should be 30 Apr 2015. New academic year in Aug 2015 should begin as planned. Management believes that student enrollment will grow eventually after the move. https://www.ofs.edu.sg/new-campus/

Profit for FY2014 was stagnant as Paterson Road has reached capacity and some teething issues with the move, but stock has seen some selling down.

Profit______S$M____Dividend
FY 2011____19.5
FY 2012____20.7____2.75cents
FY 2013____22.6____2.75cents
FY 2014____22.0____2.75cents

An education play on Singapore's reputation as a regional education hub, and servicing Expat-population's education demands. School has a good brand name and remains one of the largest/first mover in this sector. Big range of educational levels (Age 3-18, Kindergarten to IB)

Any comments/views?

(vested)

[GreedandFear]

Overseas Family School's new campus at Pasir Ris TOP date should be 30 Apr 2015. New academic year in Aug 2015 should begin as planned. Management believes that student enrollment will grow eventually after the move. https://www.ofs.edu.sg/new-campus/

Profit for FY2014 was stagnant as Paterson Road has reached capacity and some teething issues with the move, but stock has seen some selling down.

Profit______S$M____Dividend
FY 2011____19.5
FY 2012____20.7____2.75cents
FY 2013____22.6____2.75cents
FY 2014____22.0____2.75cents

An education play on Singapore's reputation as a regional education hub, and servicing Expat-population's education demands. School has a good brand name and remains one of the largest/first mover in this sector. Big range of educational levels (Age 3-18, Kindergarten to IB)

Any comments/views?

(vested)

The school primarily serves the expat community and growth will be driven by the # of expats in Singapore which, presumably, will continue as the Govt. wants to increase the overall population. The school has a decent but not great reputation. The top schools would (historically) be UWC and Singapore American School and, perhaps, Tangling Trust. At this point in time, Stamford American School and Dulwich College (new entrant) would probably also be considered top tier. As a result, OFS (as the school is known) is sometimes a "holding school" while parents wait for their children to get into one of the top schools. Most of the top schools are at capacity (but Dulwich and Stamford will still add more places next year) and hence it is a strong market that allows schools to keep increasing the already very high school fees. The only new school that seems to be not so successful in attracting students is GEMS (just opened last year). I am not sure why.

In general, the market should be very supportive for the international schools but there are some headwinds.

(1) Govt has just requested bids for up to six 30 year lease plots for new international schools (typically each new school will build capacity to 2,500 - 3,000 students).

(2) I am not sure whether OFS new location in Pasir Riis is as attractive as that of other international schools so, as more schools are built, this may make OFS less attractive.

Overall, it is a great business (21% net profit margin) that should be supported by a growing expat population but shares have run up a lot...

No longer vested in the shares but still vested in the bonds.

[shawn_sass]

The school primarily serves the expat community and growth will be driven by the # of expats in Singapore which, presumably, will continue as the Govt. wants to increase the overall population. The school has a decent but not great reputation. The top schools would (historically) be UWC and Singapore American School and, perhaps, Tangling Trust. At this point in time, Stamford American School and Dulwich College (new entrant) would probably also be considered top tier. As a result, OFS (as the school is known) is sometimes a "holding school" while parents wait for their children to get into one of the top schools. Most of the top schools are at capacity (but Dulwich and Stamford will still add more places next year) and hence it is a strong market that allows schools to keep increasing the already very high school fees. The only new school that seems to be not so successful in attracting students is GEMS (just opened last year). I am not sure why.

In general, the market should be very supportive for the international schools but there are some headwinds.

(1) Govt has just requested bids for up to six 30 year lease plots for new international schools (typically each new school will build capacity to 2,500 - 3,000 students).

(2) I am not sure whether OFS new location in Pasir Riis is as attractive as that of other international schools so, as more schools are built, this may make OFS less attractive.

Overall, it is a great business (21% net profit margin) that should be supported by a growing expat population but shares have run up a lot...

No longer vested in the shares but still vested in the bonds.

Hi,

You seem familiar with the company and the industry.

1) Definitely agree with you on the # expat population growth (these are skilled professionals with high educational background) so I do not think the government will drastically deny these people -> Demand is there.

2) The government friendly environment is as you mentioned proven even more so by EDB invitation for school bids. I think that for OFS as first mover, expanding from 3,600 to 4,800 and possibly more students is a less taxing move than developing new schools from the ground up. Hence, OFS as you also correctly mentioned, command a respectable profit margin.

3) #1 and #2 schools are like you mentioned, SAS and UWC. I had the opinion that OFS was #3. The other names you mentioned are fairly new entrants but of course with good brand names, but I don't know about their school sizes (my estimate puts it less than 3,000 students). They also do not run a full curriculum for ages 3-18 kids. Also, I'm not fully familiar with how their prices stack against each other.

4) What is a decent Price/Earnings ratio for the company? (Since you said shares have run up a lot) The bonds were a good deal IMO, 5.2% for a cash-generating business was generous.

From my many "as you have mentioned", your information is accurate and sound. Looking forward to having an interesting discourse.

Cheers.

[GreedandFear]

The school primarily serves the expat community and growth will be driven by the # of expats in Singapore which, presumably, will continue as the Govt. wants to increase the overall population. The school has a decent but not great reputation. The top schools would (historically) be UWC and Singapore American School and, perhaps, Tangling Trust. At this point in time, Stamford American School and Dulwich College (new entrant) would probably also be considered top tier. As a result, OFS (as the school is known) is sometimes a "holding school" while parents wait for their children to get into one of the top schools. Most of the top schools are at capacity (but Dulwich and Stamford will still add more places next year) and hence it is a strong market that allows schools to keep increasing the already very high school fees. The only new school that seems to be not so successful in attracting students is GEMS (just opened last year). I am not sure why.

In general, the market should be very supportive for the international schools but there are some headwinds.

(1) Govt has just requested bids for up to six 30 year lease plots for new international schools (typically each new school will build capacity to 2,500 - 3,000 students).

(2) I am not sure whether OFS new location in Pasir Riis is as attractive as that of other international schools so, as more schools are built, this may make OFS less attractive.

Overall, it is a great business (21% net profit margin) that should be supported by a growing expat population but shares have run up a lot...

No longer vested in the shares but still vested in the bonds.

Hi,

You seem familiar with the company and the industry.

1) Definitely agree with you on the # expat population growth (these are skilled professionals with high educational background) so I do not think the government will drastically deny these people -> Demand is there.

2) The government friendly environment is as you mentioned proven even more so by EDB invitation for school bids. I think that for OFS as first mover, expanding from 3,600 to 4,800 and possibly more students is a less taxing move than developing new schools from the ground up. Hence, OFS as you also correctly mentioned, command a respectable profit margin.

3) #1 and #2 schools are like you mentioned, SAS and UWC. I had the opinion that OFS was #3. The other names you mentioned are fairly new entrants but of course with good brand names, but I don't know about their school sizes (my estimate puts it less than 3,000 students). They also do not run a full curriculum for ages 3-18 kids. Also, I'm not fully familiar with how their prices stack against each other.

4) What is a decent Price/Earnings ratio for the company? (Since you said shares have run up a lot) The bonds were a good deal IMO, 5.2% for a cash-generating business was generous.

From my many "as you have mentioned", your information is accurate and sound. Looking forward to having an interesting discourse.

Cheers.

Hi shawn_sass.

1. When I talk about the top schools, I meant their attractiveness to prospective parents. OFS is the third largest (by number of students) but I wouldn't classify it as a highly desired school. It is a well run / good school.

2. Most of the other schools aim to have 2,500 to 3,000 students. Stamford American currently has 2,500 and should hit 3,000 next year (this is up from only 1,000 two years ago). Dulwich College opened with 500 in August 2014 and have apparently now hit 1,000. Not sure about GEMS.

3. Stamford American offers full education through high school and I believe most other schools also do so or plan to do so within a few years (eg Dulwich) so I don't think OFS has any edge there.

The main threats that I see are :

1. Asian or global economic crisis which will immediately cause a large decline in the expat population
2. Fees cannot keep increasing at 6-7% p.a. when most schools already charge about 30,000 a year. Not all expats get these fees paid by their employers and alternatives include sending the kids to a boarding school in their home country, attending a local school or having them attend one of the international schools in JB (Marlborough has a good reputation).
3. Teacher shortage resulting in wage increases

Once the school is at capacity, it becomes a mature / utility type business provided that it can maintain its standards and there aren't a lot of new schools being opened. At that point, it seems difficult to imagine fee increases significantly beyond inflation whilst teachers salaries probably need to match inflation. So you will have a "boring", stable but highly profitable business with a decent dividend. Supermarkets are boring businesses trading at 22x prospective earnings but they are a lot more recession proof than schools catering to expats. Currently OEL is trading at 16.2x prospective earnings. That is probably fair but doesn't leave me with a lot of margin for error, hence I am no longer vested in the shares but only in the bonds.

Definitely one to keep watching

Vested in the bonds.

[shawn_sass]

Oh my, your data/knowledge is impressive. Do you work in the private education or have access to Foreign System Schools industry matters?
If so, could you shed some light on what the fees are at the various schools? I'm expecting OFS to raise school fees at the new campus or in the near future but don't know enough to know how much headroom the school fees have. (You mentioned 6-7% p.a. so far?)

Update for 1Q15: Earnings this quarter have been pretty much stable and maintained -> No surprise there.
Revenue has dropped due to reduced students but that was foreseen. Personnel expenses have been cut, I believe teachers have been cut and it's sort of a belt tightening measure at this point.
My gut feel is the new school will be the catalyst and the next ascending step.

My position was initiated early March 2015 but so far still watching (like you) to see if its worth adding more.

(vested)

[GreedandFear]

Oh my, your data/knowledge is impressive. Do you work in the private education or have access to Foreign System Schools industry matters?
If so, could you shed some light on what the fees are at the various schools? I'm expecting OFS to raise school fees at the new campus or in the near future but don't know enough to know how much headroom the school fees have. (You mentioned 6-7% p.a. so far?)

Update for 1Q15: Earnings this quarter have been pretty much stable and maintained -> No surprise there.
Revenue has dropped due to reduced students but that was foreseen. Personnel expenses have been cut, I believe teachers have been cut and it's sort of a belt tightening measure at this point.
My gut feel is the new school will be the catalyst and the next ascending step.

My position was initiated early March 2015 but so far still watching (like you) to see if its worth adding more.

(vested)

[GreedandFear]

All the schools post fees on their websites, so you just need to go through them