Published March 14, 2009

Oriental Scandal

Raffles Education shares defy shock

Stock rises despite accounting scandal in 30 per cent owned Oriental Century

By OH BOON PING

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SHARES of Raffles Education appeared little affected by the accounting scandal that hit its associate Oriental Century Ltd.

Yesterday, the stock price went to a day high of 38 cents before closing at 36 cents - up from 34 cents a day earlier. Some 38.75 million shares changed hands.

The price rally came despite Oriental Century saying on Thursday that its sales and cash balances could be inflated over several years. Oriental's CEO Wang Yuean, who confessed to the alleged fraud, has since resigned.

In the worst-case scenario that Oriental Century ceases to be a going concern, Raffles Education may need to fully write off its entire investment of $34.6 million or 1.5 cents per share. This will reduce its net book value from 16.46 cents per share as at Dec 31, 2008 to 14.96 cents per share.

Meanwhile, a number of analysts remain upbeat on Raffles with DBS Vickers calling a 'buy' on the stock at a target price of 78 cents.

Its analyst Andy Sim noted that Raffles maintained 'that its own operations are still robust' and except for Oriental, the group retains management control in its recently acquired entities such as Oriental University City (OUC), Shanghai Zhongfa and Tianjin Boustead.

He believed that 'the current situation is confined to ORIC (Oriental) and the market has priced that in. Management has so far delivered growth, and valuation is at a significant discount to peers, trading at an average price-earnings of of 22 times'.

Credit Suisse, which issued an outperform, said that Oriental's contribution of 2.9 per cent of Raffles' forecast FY09 earnings appears negligible.

It believes that Raffles' management perhaps has plans to realise value from Oriental's China-based franchise.

However, CLSA which recommended a 'sell', pointed out that the latest saga reflects the risks of acquiring schools in China, 'where Raffles has made five acquisitions over the past two years'.

'We maintain our negative outlook on Raffles and expect 18 per cent profit contraction in FY10. Without new acquisitions, FY10 will be the first year that the company's growth will only be driven by organic opportunities.'

Analyst Caroline Maes also projects a 2 per cent drop in the company's student body as fewer students can afford to pay up to US$10,000 per year for its programmes. 'Growth at OUC will be limited in the next few years as the new schools will take two to three years to break even and the company has lost its profit guarantees.' Citigroup, which issued a 'hold', changed Raffles' risk rating to 'speculative' from 'high' and lowered its target price to 40 cents.