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