Raffles Education - Hit by impairment charges

The group recorded a net loss of $16.5m in 3Q09 as it wrote off the $34.6m allowance of impairment for Oriental Century in the quarter. 3Q09 core net profit after adjustment of exceptional items was $14.65m (-27% yoy, -38% qoq). 9M09 core net profit of $66.2m was below our expectation mainly due to lack of growth in student enrolment, hefty set up costs of new premises, its more prudent bad debt policy and lower forex gains.

Normalised core earnings in 3Q09 weakened as operating costs out-paced revenue. Rental costs surged in line with the business expansion and additions of OUC, Wanbo and Shaanxi, while personnel expenses rose 27% qoq due to expanded headcount. Meanwhile the lack of student enrolment during the seasonally weak recruitment period (total students 32797 vs 32873 in 2Q09) weighs on its top-line.

OUC continues to contribute positively to the group’s earnings, as its profit in 9M09 more thandoubled yoy to $10.6m. Growth potential from OUC remains huge, while the new colleges in Bangalore, Jakarta, Langfang, New Delhi and Yunan will contribute positively to student enrolment going forward. The group expects student enrolment to pick up by 4Q09, targeting a 15% increase in student population by year-end.

No dividends were declared this quarter, the first time since listing, as cash conservation has become the key priority. Positioning to be a stronger education player in the next upturn, the group aims to strengthen its balance sheet by reducing its gearing from 1.1x to zero by 2010.

We have reduced our earnings estimates for FY09/FY10 by 27% and 12% respectively as we built in lower student enrolment in FY09 and higher operating costs. However, with the stock trading near to the low of its PER cycle, weak earnings could have been priced-in. Moreover, its strong free cashflows of $117m YTD (+189% yoy) supports its value proposition of defensive earnings. Maintain BUY.

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