Despite declining revenue, UOB expects Overseas Education to perform well for FY19

SINGAPORE (May 8): UOB KayHian is keeping its “buy” call on Overseas Education (OEL) with a target price of 46 cents.

OEL yesterday announced that its 1Q19 earnings have increased by 9.65 to $2.1 million, compared to $1.9 million in 1Q18.

However, revenue dropped 3.4% y-o-y to $20.5 million, mainly due to weaker student enrolments, but the decline has narrowed compared to the 4.6% decline in 1Q18.

Total expenses also dropped 9.2% y-o-y to $14.4 million, due to lower financing costs and personnel expenses.

The results were in-line with the research house’s expectations, meeting 28% of its FY estimates.

In a Wednesday report, lead analyst John Cheong says, “We expect 2Q19 to perform better on significant cost savings of around $3.3 million from the refinancing of its borrowings and further reduction of operating costs. This might be offset by a revenue decline of $2.6 million.”

To recap, OEL has successfully refinanced its bonds of $117.8 million on Apr 17 and this should contribute to one and half months of interest savings.

In terms of EBIT margin and balance sheet strength, the group has shown some notable improvements from 2016 to 2018.

“Given time, we believe the continued strengthening of its brand name in the new location will help to attract more students. On the other hand, with the refinanced loan, debt level will continue to fall over time and lead to a stronger balance sheet and potentially higher dividend,” says Cheong.

The analyst expects an 11.2% growth in net profit for FY19, driven by the narrowing decline in revenue, as well as the reduction in operating costs which has outpaced the drop in revenue growth over the past two years.

As at 3.05pm, shares in Overseas Education are trading at 30 cents or 0.9 times FY19 book with a dividend yield of 9.2%.