Raffles Education Corp (KimEng)

Event

Raffles Education Corp (REC) has entered into a Sale and Purchase Agreement with Mr Ding Fu Ru to sell its 50% stakeholding in subsidiary Value Vantage Pte Ltd. The cash proceeds of $46m will be used to reduce its bank loans and for working capital purposes. Despite the uninspiring results of FY Jun11, we remain optimistic about a turnaround in REC’s education business, which should lead to a stock re-rating.

Our View:

Value Vantage mainly invests in education projects in China and has subsidiaries that offer consultancy and management services. REC plans to leverage on its strategic tie-up with Mr Ding, said to be an industrialist and real estate developer in China, to venture into educational services, which can potentially yield significant gains for the group. These include the building of student accommodation and other commercial facilities.

Notwithstanding the scepticism about its real estate plans, REC’s latest move should be regarded as merely a means to monetise its China landbank, which has enjoyed a sharp appreciation in value in recent years. We expect the group to record a one-off gain of about $23.7m upon completion of the transaction by the end of the month on 28 July.

Management’s active pursuit of opportunities in other markets, namely, Iskandar Malaysia and the Middle East, demonstrates its unwavering focus on the education business. We expect the core operation to post notable improvement as the 13 colleges set up during FY Jun09/10 should turn earnings-accretive from FY Jun12/13 onwards. To be sure, this will also help to offset the impact of falling enrolment numbers in China amid the structural changes in the country’s operating landscape.

Action & Recommendation:

As REC starts to reap the fruit of its investment in the past two years, we expect the sustainable earnings recovery in FY Jun12 to drive a meaningful re-rating of the stock. We trim our SOTP-based target price to $0.80, from $0.90, after removing the development surplus from our valuation model in view of the timing uncertainty. Maintain BUY.