Raffles Ed - Buy rating with a price target of S$0.81

Raffles Education is one of the key stock picks in Simon Smiles’ Q-Series®: Asian Structural Themes report, published on 4 February 2009. We believe the education sector would benefit from rapid economic and consumption growth, because spending patterns would evolve from basic consumption, to goods and services associated with a ‘better life’.

China’s one-child policy coupled with rapid urbanisation has led to a generation of single-child families with the capacity to spend a significant portion of income on education. This will drive demand for Raffles Education’s (REC) services, in our view. The company’s China footprint spans several first- and second-tier cities, where it is able to offer courses with different price points and content to cater to local demand.

We believe potential catalysts for re-rating are: 1) the good take-up rate for its scrip dividend scheme, we estimate a 60% take-up rate could potentially save S$55m for internal use; 2) divestment of the Raffles Institute in Mumbai could unlock S$10- 20m in value; 3) scope for earnings updates if two OUC colleges are transferred faster than expected; and 4) traction in opening new colleges and Sino-foreign ventures.

Our DDM-based price target assumes 11.9% COE and 5% terminal growth.

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