Raffles Education - Start of real estate unlocking? (DBSVickers)

HOLD S$0.49 STI : 3,066.85

(Upgrade from Fully Valued)

Price Target : 12-month S$ 0.52 (Prev S$ 0.58)

Reason for Report : Company announcement

Potential Catalyst: Further realisation of value in real estate; turnaround in operations

• Sale of 50% stake in subsidiary to net S$23.7m gain

• Move not surprising and in line with management’s desire to unlock real estate value

• Students taking “Gao Kao” continue to slip; will have an impact on RLS’s enrollment, albeit smaller vs FY11

• Shares slumped c.30% since May, upgrade to Hold with revised TP of S$0.52

Sale of 50% stake in a subsidiary for S$46m. Raffles Ed has entered into a Sales & Purchase agreement to sell 50% of a subsidiary, Value Vantage Pte Ltd, for S$46m. According to the announcement, this subsidiary has interest in various education projects in the region. The purchaser is Mr Ding Fu Ru, who is said to be an industrialist and real estate developer in China. Book value of the 50% stake is $22.1m and RLS will reap S$23.7m net gain. The deal will be completed by 28 Jul and booked in FY12. Sale proceeds would be used to pare down debts and for working capital purposes.

Not surprised by the move to unlock value. We understand that the sale will have no impact on its NES education operations in Shanghai, China. We are not surprised by this move and view this as mildly positive, as management has previously indicated its desire to "unlock" the value of its real estate to complement its anemic education business growth.

Separately, Gao Kao still sees declining student numbers. According to media reports, the number of students taking China's Gao Kao exams fell c.3% to 9.33m in 2011 from 9.57m last year. This would further impact Raffles Ed's student enrollment for its PES/ NES schools in FY12F, though by a smaller magnitude than in FY11.

Upgrade to Hold, TP: S$0.52. We trimmed our forecasts by c.11-12% to factor in FX losses in FY11F and lower enrollment arising from the fall in Gao Kao takers in FY12/13F. Consequently, our SOP-based TP is lowered marginally to S$0.52 (S$0.58 previously). After c.30% decline in share price post its dismal 3Q results, the counter now looks oversold at 0.7x P/BV. However, we remain cautious amid the uncertain outlook for its education business. As such, we upgrade to Hold, from FV.