Price $0.620
Target $0.800
ST Index 3,189.26
Event
We hosted a one‐day non‐deal roadshow (NDR) in Kuala Lumpur for Raffles Education Corp (REC) last week. It was group Chairman and CEO Chew Hua Seng’s first overseas roadshow in more than two years. Overall, the trip has helped to extend investor outreach while reinforcing our contrarian view that REC is firmly on the recovery path. Reiterate
BUY.
Our View
The key issues raised during the NDR pertained to dwindling student numbers, Khazanah Nasional’s interest in Oriental University City (OUC) and REC’s China real estate plans. To be sure, these were not new concerns and management’s replies were largely in line with what we had discussed in our earlier reports.
The near‐term outlook in China remains a challenge but management is optimistic that positive contributions from the new colleges it set up in the past two years should lead to a turnaround in its bottomline. In fact, the main headwind is the strong Singapore dollar, given that it is the group’s reporting currency and that 85% of its revenue currently comes from its regional operations.
To our surprise, investors were more accepting of the group’s desire to unlock its real estate value. As returns from the education business tends to be slow and over the long haul, management took pains to explain the rationale behind its recent sale of a 50% stake in subsidiary Value Vantage Pte Ltd and potential monetisation of OUC’s landbank. The cash proceeds will eventually be ploughed back into its core activities to build a more sustainable and robust business model.
Action & Recommendation
REC’s share price has recovered by almost 28% since our last update on 5 July 2011. Despite the uninspiring results expected of FY Jun11 (likely to release around end‐August), we believe the group will still pay a DPS of 0.45 cents after the 3‐to‐1 share consolidation exercise. Maintain BUY and our SOTP‐based target price of $0.80.
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