Overseas Education started at 'buy' on stabilising student numbers, interest expense savings

SINGAPORE (May 10): Lim & Tan Securities has started coverage on Overseas Education Limited (OEL) at “buy” with a target price of 48 cents, representing a 60% upside potential from the stock’s 30 cent share price.

In an initiation report on Wednesday, the research house says it expects OEL’s current cash flows and huge cash balance could be used to maintain dividends of 2.75 cents, due to lower capital repayment after refinancing its $117.75 million bond at favourable rates.

Lim & Tan is also of the view that OEL’s decline in student numbers have largely stabilised post its campus shift from Orchard to Pasir Ris, and henceforth will see improvements in financials moving into FY19.

In spite of a projected revenue decline of 4% in FY19, it expects the group’s profit to grow by 8.1% for the year due to cost-cutting initiatives and a reduction in interest expense.

Further, at OEL’s current “undemanding” valuations of 0.87 times P/B and a 14.9 times forward P/E, Lim & Tan sees room for a share price run-up as it believes the market has yet to fully absorb the tapering student number decline as well as the favourable terms of its successfully refinanced debt.

“Despite top-line declines in growth, OEL has always managed to be profitable due to their flexible business model that allows them to scale back on teaching staff due to lesser students. Additionally, OEL has a very cash-generative business as students pay for tuition fees before commencement of education,” notes the research house.

“As a non-traditional business, we think that PE is not the best valuation tool to value OEL. Due to its stable dividend payments and cash flow generative business, we have thus adopted the DDM and DCF valuation approach to fairly value OEL,” it adds.

Shares in OEL closed 1.67% lower at 30 cents on Thursday, or at 0.9 times FY19F book value.