Sunday, 3 February 2013

Overseas Education Limited


Overseas Education Limited ("OEL" or the "Company") is offering 125m New Shares for a main board listing on SGX, of which 3.75m shares will be for the public offer and the balance 121.25m shares via placement. The shares will be  offered at $0.48 each. The prospectus is here. The offer will close on 5 Feb at 12pm and starts trading on 7 Feb 2013. The market cap based on the IPO price will be around S$187.4 million.

OEL is a private foreign system school in Singapore, offering the K-12 IB curriculum for children aged 3 and 18 years. OEL is one of the top 3 foreign system schools in Singapore and according to the prospectus, has a 10.3% market share here. The Company currently has a staff strength of 501 and 3,753 students. The Company is running at almost full capacity and is in discussions with various government agencies on the allocation for a permanent site for construction of a new school campus and all of the net IPO proceeds will be used to build this new school.

The purpose for the IPO is to raise funds for new campus, enhance its image, tap capital markets and provide everyone with the opportunity to participate in the growth of the Company. The bulk of the proceeds of $56m raised is for building a new school campus. I like the fact that the founders are not cashing out and only new shares are issued.

Financial results


Revenue has grown from S$75m in FY2009 to $89m in FY 2011. For the first half of 2012, the Company made a revenue of $46m and a net profit of $9.4m.

The graph below shows the profitability in the last 3 years, including first half of 2012.

Based on the enlarged share capital of 390.36m shares, the EPS for FY2011 was Singapore 4.99 cents and that translate into a historical listing PER of around 9.62x

The first half net profit margin seemed to have declined to 20.2% and the EPS based on the enlarged share capital is Singapore 2.4c. Assuming FY2012 is a "stagnant year" as the revenue grow by 5% but the net margin drops to 20.2%, the projected FY2012 earnings will be around S$18.95m and the EPS will be approximately Singapore 4.85 cents. This translate into a PER of around 9.9x

Dividend Policy

After reading prospectus for the last many years, it is very interesting to note that the Company has stated in its prospectus that it intends to pay out at least 50% of its net profit after tax for each financial year. This is a pretty strong statement to make. Hence for investors who are keen to receive a dividend income every year, this stock will be suitable. The Company has demonstrated its ability to pay dividends by paying almost half of its net profit after tax for the last 3 years. So you can see that this is a high cash flow generating business.

Assuming EPS for FY2012 is Singapore 4.85 cents, the DPS will be around Singapore 2.425 cents and that translate into a yield of around 5.05%, which in my view, is pretty respectable.

Over-allotment

The underwriter is able to over-allot if the demand is hot by up to 25m shares. The shares will initially be used for price stabilization post IPO and thereafter, if not utilized for stabilization, the proceeds will go to the Company and be used for the new premises.

Shareholders

The company is jointly owned by Mr. David Perry (34.7%) and Ms. Irene Wong (33.3%) with the balance held by the public (32%).

Competitors


The Company is ranked no.3 in Singapore in terms of "revenue" generated. 

What I like about the Company
  • High recurring income as students are "locked-in" for the long term from junior to senior school
  • I always like the education Sector and the simple business model. The IB program is getting more recognized with some of our branded mainstream schools offering them as well.
  • Target the expatriates community which are usually less price sensitive as part of the fees are subsidized by the companies which they worked for. 
  • Market for FSS continues to grow at around 8% until 2016. (According to a research in the prospectus).
The Concerns
  • Macro and government policies driving the expatriates community away from Singapore (or if Singapore loses its attractiveness).
  • Competition from new schools offering the IB program at lower fees.
  • Revenue and profit growth is limited unless the Company is able to find and build a new premises as the capacity for students is reached.
  • Management succession plans (Co-founders are aged 71 and 58 respectively). The daughter of Ms. Irene Wong is being groomed to takeover and is currently a management trainee. 
  • Bad local "experiences" looking at how education counters such as Raffles Education, Informatics and Oriental Century have performed post IPO.
Fair Value and Ratings

Raffles Education has been making losses for FY2011/12 due to its ill-fated attempt to set up a school in China. It will probably make a small gain for FY2012/13 and is trading at a forecasted PE multiple of 38x for FY2012/13. Informatics is even more expensive, trading at 63x PE. These two have been very poor barometers of our education stocks in Singapore (even though Raffles Education used to be a darling here). I definitely hope OEL will prove to be different.

Assuming OEL trades at a PE valuation of 10-15x, which in my opinion is fair, the trading range will be between 49 cents to 73 cents. Given that OEL is highly profitable with a well-run operations and attractive dividend payout ratio, i would give a 3 Chilli Rating and consider it as a candidate to add to my SRS portfolio. Hoot ah.

Happy IPOing. If you make some money but don't know how to spend it, you may check out the "sponsored video" on the top right hand corner of my blog. haha


27 comments:

Anonymous said...

With little public tranche, I am going to Hoot all in. Mr IPO, in you we trust. been waiting for your post all weekend long.

Mr. IPO said...

hahaha thank you for your patience... good luck! The public tranche is too low.

Anonymous said...

The PE for the other 2 companies are above 30, why do you think OEL should trade at 10-15x?

Mr. IPO said...

For rationale reasons lor...The other 2 are at crazy valuations .. maybe can ask the shareholders of the other 2 to switch to this? :P

Anonymous said...

It seems that the ipo shares are all new shares. There are no vendor shares.

This is a positive point, isn't it?

Mr. IPO said...

Yep. I mentioned it in my post. :)

Anonymous said...

Yes. You did. I overlooked that. Thanks.

I will also apply; though it is a bit expensive... But, comparing with Raffles and Informatics.. it is cheap...

Mr. IPO said...

haha apply only if you like it and based on your own analysis :)

Why do you consider this stock as a bit expensive? Using what methodology? Care to share?

James said...

I did a quick calculation of its net profit margin for FY2009-2011, and it has been ~20%, which is good.

One main concern is the age of one of the co-founders. At age 71, he would probably retire soon, and it remains to be seen if his successor would be as good.

I'll probably go for this one, especially with the market sentiment so positive at the moment.

Anonymous said...

You made a mistake about the mgmt trainee salary. Their band is different calculation to the directors. Please read the prospectus again and amend the neccessary. Thanks.

Anonymous said...

Thanks for the analysis.

Anonymous said...

do you know which end of the indicative price range it was priced? higher or lower end? i am quite wary of the 0.48c price compared to raffles edu and infomatics

Mr. IPO said...

My apologies. You are right. :) will amend it when I am free tonight.

Mr. IPO said...

I think you should not look at the price quantum but the valuation behind the price. Information and raffles maybe cheaper in price but expensive in valuation.

James said...

Raffles Edu valuation currently is actually attractive, chart looks tobe bottoming out too. But Informatics is at crazy PER.

I guess many retailers would shun private education institutes, especially after several negative headlines (sudden closures) last year.

How many placement shares are you getting for this, Mr IPO? :D

Mr. IPO said...

Hi James, no lobang for placement this time. Have to do this the traditional way. :)

Anonymous said...

going all in.

expecting heavy oversubscription, since many have cashed in on the recent market euphoria...

ValueGuy said...

Hi Mr. IPO
I'm too late to subscribe! Would it be possible to pick up some shares as soon as they IPO? (Ie assuming that they don't have a lockup period for the IPO subscribers?)

Mr. IPO said...

Err... It depends on what price it opens tomorrow ? So I can't tell u. Usually the founders have lock up but not other placement holders.

Anonymous said...

Applied for 10 and didn't get any... Full amt refunded :(

Anonymous said...

applied but unsuccessful! got no allotment at all. Can not believe it!

leopard said...

Guess what would be the debut price tmr?

Anonymous said...

Anyone knows what is the oversubscription rate?

Anonymous said...

applied 100,000 but was allotted 5 lots. Three of my friends applied the same but all rejected.

Mr. IPO said...

Seems like overwhelming demand for the public tranche ah... We shall see if there are "branded names" in the placement tranche later.

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MBBS in Philippines said...

Good Analysis

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