Event
Excluding exceptional items such as forex loss, fair value gain and tax on revaluation, Raffles Education Corp’s (REC) 4QFY Jun11 results were largely in line with our expectation. On a full-year basis, we estimate its core profit from the education business to be about $21.8m (-40.4% YoY). In any case, we believe the market has already discounted the uninspiring FY Jun11 results. The group has proposed a final dividend of 0.45 cents (total payout of 0.90 cents per share for the whole year), which translates to an annualised yield of 2.1%. Maintain BUY.
Our View With 85% of its revenue derived from overseas operations, REC is clearly facing strong headwinds due to the appreciating Singapore dollar. This also adds to woes from the persistently weak student enrolment in China. While headline revenue fell by 16% YoY to $157.6m, we estimate it would have posted a smaller-than-expected decline of 12% after stripping out the effect of currency translation.
Nevertheless, REC continued to see notable improvements in its student numbers outside of China in 4QFY Jun11. In terms of geographical breakdown, revenue contribution (ex-China) accounted for about 36.2% of overall turnover compared to 30.9% a year ago. We remain optimistic that positive contributions from the 14 new colleges set up in the past three years could lead to further revenue diversification.
Management said it would not be pursuing any aggressive regional expansion as it intends to focus on improving the profitability of its existing schools. On this basis, we expect the group to begin enjoying some form of operating leverage after the initial phase of high investments to grow its college network across the Asia Pacific.
Action & Recommendation
We maintain our BUY recommendation and SOTP-based target price of $0.80. Near-term re-rating catalysts include successful monetisation of OUC and faster-than-expected recovery in student numbers.
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