Raffles Education - 3QFY09 Results Confirm Depressed Growth Trends

Fundamental concerns remain — The weaker-than-expected 3Q results confirm our concerns of slowing organic growth (only 1% YoY in 3Q vs. 10% in 1H; 8% QoQ decline), and we expect growth to remain depressed near term, as newly set-up colleges take time to ramp, making current Street estimates appear too aggressive. Our cautious thesis is unchanged; we continue to seek clarity on execution steps for OUC. Despite lowering estimates, we raise TP to S$0.60 (from S$0.40) as we roll over to ’10 base year and apply a higher PEG (0.8x) to reflect market re-rating. We lower risk rating to High (based on our quant system).

3QFY09 (end-Mar) results below expectation — Revs of S$49.9m (-7.9% QoQ, +1.4% YoY) were below our S$55.6m est. REC dipped into net loss of S$16.5m, though affected by S$33.1m provision for write-down of its Oriental Century investment and S$1.5m reversal of 1H gain; however, even excluding this, net profit of S$18.0m was still below our S$25.9m. No dividend due to net loss.

Slowing organic growth — 3Q was the 1st quarter in the past 2 years to purely reflect REC’s organic growth, without new acquisitions. While the 9.7% YoY organic growth for 1H had already been softer than expected, the further deceleration to 1.4% in 3Q was a negative surprise (esp. considering RMB strength). This slowdown was attributed to ~10% enrollment growth partly offset by rev mix shift toward lower-tuition NES. The 8% QoQ decline was explained by weaker seasonality and surprisingly, the econ slowdown.

Balance sheet — At end-3Q, REC had S$58m in cash & equivalents (down from S$76m in 2Q). Short-term debt was S$178m (vs. S$164m in 2Q).

Sponsored Links