Published February 12, 2009

Raffles Education facing biggest test yet

By OH BOON PING

	Email this article
	Print article
	Feedback

PRIVATE education provider Raffles Education Corp recently reported a sterling set of second-quarter results that saw net profit jump 66 per cent to $27 million, while revenue for the quarter rose 38 per cent to $54.2 million.

And the market appears to have responded positively to the news, with the stock ending yesterday at 50.5 cents, 4 per cent up from the closing of 48.5 cents last Thursday, the day that the financial results were released. But market optimism aside, an interesting question to ask is whether Raffles is able to sustain its rapid growth amid the increasingly gloomy economic climate.

Raffles said that the group expects to see continued growth by setting up more colleges in the region, developing its proprietary courseware, through value creation of Oriental University City (OUC), a new acquisition in China, and from strategic acquisitions. And to date, the group has been very successful, as seen from the 47.7 per cent compound annual growth rate in its turnover for the past few financial years.

However, it is also clear that a significant part of that rapid growth in revenue stemmed from acquisitions made in previous years. For example, organic topline growth for FY08 was only 26.5 per cent compared with the 53 per cent total reported, while the equivalent figures were 22.5 per cent against 37.7 per cent in the preceding year.

A look at its core profit before tax and finance costs paints a similar picture - organic growth was 37.8 per cent compared with the total core earnings growth of 65.8 per cent reported. And so the question is: for how long can the company continue to buy assets to fund its rapid growth, especially when liquidity appears to be drying up in debt and equity markets?

Plus, in view of the increasingly bleak economic environment, it is worth noting that growth in Raffles's H1 2009 organic operations came to only 9.7 per cent - a possible sign that business is slowing.

Granted, vocational education is usually seen as counter-cyclical and more students may choose to return to school for upgrading in times of economic uncertainty. However, in emerging markets such as China, private education programmes can sometimes be seen as unnecessary expenditure, especially if it involves substantial amounts of financial commitment. Therefore, if fees are not cut, it is conceivable that organic growth may slow even further should the economic situation worsen.

To Raffles's credit, it successfully deferred payment of its second OUC instalment of $100 million, as well as two subsequent payments for at least a year without interest, and this will help the company stay liquid in such uncertain economic times. This will also prove important as it needs funding to open up new schools as part of its organic business expansion.

However, attempting to maintain its solid performance is now a different ballgame given the continuing global financial turmoil. The journey ahead may well be the biggest test to date for Raffles.