By Carey Wong
Thu, 4 Feb 2010, 10:57:28 SGT

Raffles Education Corp (REC) reported a disappointing set of 2QFY10 results; revenue came in at S$47.2m, down 12.9% YoY and also 8.5% QoQ, PATMI tumbled 74.1% YoY and 50.1% QoQ to S$7.0m. Excluding exceptional items and forex, core earnings still fell 51.4% YoY and 37.8% QoQ. 1HFY10 revenue fell 8.0% to S$98.7m, while PATMI tumbled 64.0% to S$21.1m; core earnings at S$24.4m (ex forex and exceptional items). Going forward, REC also remains committed to growing organically; just recently, REC said it is pumping S$4m in initial investment to set up four colleges in India. REC intends to set up one more college in India and acquire three colleges in China (located in OUC). However, with a 2-3 year breakeven for each new college (depending on location), REC does not expect to see significant earnings contribution until FY11 (for five colleges invested in FY09) and FY12 (those invested in FY10). As such, we have pared our FY10 revenue forecast by 12.2% and core earnings by 51.8%; also paring FY11 revenue estimate by 23.8% and core earnings by 55.0%. But in line with the more upbeat market sentiment, we raise our valuation from 18x FY10 EPS to 20x blended FY10/FY11 EPS to derive a fair value of S$0.37 (down from S$0.60 previously). As we think that the worst is likely over for REC, we maintain our HOLD rating.

Disappointing 2Q10 results. Raffles Education Corp (REC) reported its 2QFY10 results, which showed disappointing QoQ declines. Revenue came in at S$47.2m, down 12.9% YoY and also 8.5% QoQ, still hit by lower student intake since end FY09. Coupled with higher staff cost, PATMI tumbled 74.1% YoY and 50.1% QoQ to S$7.0m; excluding exceptional items and forex, core earnings still fell 51.4% YoY and 37.8% QoQ. Interim revenue fell 8.0% to S$98.7m, while PATMI tumbled 64.0% to S$21.1m; core earnings at S$24.4m (excluding forex and exceptional items). REC did not declare any interim dividend vs. share scrip of 1.0 S cent per ordinary share in 1H09.

Improvement in student enrolment still slow. While its private education segments continue to show modest student growth (adding 191 new students), they were not enough to offset the 2157 drop in NES (National Education) students since end FY09; management notes that the NES segment is out of its control as allocation is done by the Chinese government. Overall student population is still about 5.6% lower as compared to end FY09. Nevertheless, REC believes that it should be able to recruit the usual 900 students during its annual recruitment drive in Apr.

Organic growth still very much on the cards. REC also remains committed to growing organically. Just recently, REC said it is pumping S$4m in initial investment to set up four colleges in India; the colleges, which will be set up under the Raffles Millennium International flagship, will cost an initial investment of S$1m each. Still on the cards, REC intends to set up one more college in India and acquire three colleges in China (located in OUC). By end FY10, REC expects to have 34 colleges and three universities in 34 cities across 13 countries.

Revising fair value to S$0.37. However, with a 2-3 year breakeven for each new college (depending on location), REC does not expect to see significant earnings contribution until FY11 (for five colleges invested in FY09) and FY12 (those invested in FY10). As such, we have pared our FY10 revenue forecast by 12.2% and core earnings by 51.8%, and also pared FY11 revenue estimate by 23.5% and core earnings by 53.0%. But in line with the more upbeat market sentiment, we raise our valuation from 18x FY10 EPS to 20x blended FY10/FY11 EPS to derive a fair value of S$0.37 (down from S$0.60 previously). As we think that the worst is likely over for REC, we maintain our HOLD rating.