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Raffles Education: Acquisition of Merchant Square
 
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Raffles Education: Acquisition of Merchant Square

By Andy Wong
Mon, 17 Jan 2011, 09:04:43 SGT

Raffles Education Corp (REC) announced that it would be acquiring Merchant Square, which is a 99-year leasehold office with a total NLA of 50,262 sf, for S$65m. Merchant Square would be used for REC’s Singapore campus when its lease expires in Jan CY13. Management has highlighted that the acquisition will allow the company to secure a permanent place of business as compared to sourcing for a new leased premise. We estimate that the bulk of the acquisition will be financed by mortgage loans with the remainder funded by internal cashflows. We incorporate higher interest expenses into our assumptions, partially offset by rental income from current tenants before REC begins renovation works towards the end of CY12. As a result, our fair value estimate decreases marginally from S$0.285 to S$0.28 (still based on 18x FY11F EPS); although we wish to highlight that REC will experience a reduction in rental expenses when its Singapore campus’s lease expires. Maintain HOLD.

Acquisition of Merchant Square... Raffles Education Corp (REC) announced that it has exercised an option to acquire Merchant Square for S$65m. This is a 99-year leasehold office property with a total net lettable area (NLA) of 50,262 sf. Merchant Square is located strategically at the centre of Merchant Road, Fisher Street and Angus Street near Clarke Quay MRT station; and comprises a four-storey office tower and two blocks of shophouses. REC believes that the acquisition will now enable the company to secure a permanent place of business instead of using rented premises and facing the risk of relocation when the lease expires. We understand that REC’s lease for its Singapore campus (located at Beach Road) expires in Jan CY13 and the landlord has stated plans for the use of the area once the lease is up. Hence the Merchant Square building will be used for its new Singapore campus and would provide stability for REC’s future operations. The current campus has an estimated population of 1,700 students while the new premises will be able to house up to 2,000 students. Management has also highlighted the possibility of converting the carpark at Merchant Square to usable space, which would see its NLA increase to approximately 65,000 sf.

…funded by internal resources and debt. We believe that the bulk of the acquisition will be financed by mortgage loans with the remainder funded by internal cashflows. Hence REC’s finance cost is expected to rise although this will be partially offset by rental income from the current tenants of Merchant Square. Renovation of the building will commence towards the end of CY12 to prepare for REC’s relocation in Jan CY13. We also estimate that REC’s net gearing ratio will increase from 9.1% to approximately 17.0% for FY11 as a result of this acquisition.

Maintain HOLD. REC’s latest move highlights that it could be moving towards an asset-heavy business model, which is likely to provide stability for its operations. REC also owns investment properties in Oriental University City (OUC) in PRC, with plans to develop the area into a vocational training hub in the future. We incorporate higher interest expenses into our assumptions, partially offset by rental income as a result of this acquisition. As a result, our fair value estimate decreases marginally from S$0.285 to S$0.28 (still based on 18x FY11F EPS); although we wish to highlight that REC will experience a reduction in rental expenses when its Singapore campus’s lease expires in Jan CY13. Maintain HOLD.

 
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