Raffles Education - Positive steps forward

OUC debt update. We met up with the Raffles Education Corporation (Raffles) recently to obtain some updates. Raffles confirmed that there will be no interest paid for debt pertaining to its Oriental University City (OUC) purchase and that the subsequent payments of RMB1.5b would be phased into three tranches. The next major payment of RMB500m will be due on 30 Apr 10. We believe the interest-free deal was struck as a give-and-take agreement due to non performance of "Material Conditions" stated in the Schedule of the original agreement dated 11 Oct 07. In a gist, the main unfulfilled conditions include 1) transfer of Langfang Vocational and Health Schools (contributes up to 20,000 students) and; 2) obtaining permits for 1 private college and 2 public-private schools.

Securitising OUC in progress. Management continues to be optimistic that OUC is a well worth investment to embark on its next phase of growth. The listing plan to pay for this asset took its next step with the recent debt deferment deal where 60% of OUC debt is to be repaid in full "upon the recovery of the economy from the current global economic crisis." Post listing, the provincial government will likely own a significant part of OUC. While we are uncertain of the provincial government's intention with its shares, we think that it would still keep a stake seeing that it can be a cash producing asset that has now been turned around by Raffles. As education is largely driven by regulators, the government's stake in the listed entity will be seen as an advantage for Raffles.

ORIC update. Separately, Oriental Century (ORIC) released a 17-page update by PWC on 26 May 09. PWC basically indicated that it would be impractical to trust any of the accounts. While one of the three operating entities seem to be operationally profitable at this point, PWC warned of possible significant attrition of student numbers due to lack of confidence as a going concern. Raffles has indicated that it could possibly acquire ORIC if it ascertains all its documented and undocumented liabilities.

Paring expectations for the year. We have pared down our estimates for FY09 and FY10 as we mitigate our expectations on the rate of growth its organic expansion can bring. Our fair value is tweaked to S$0.57 (prev. S$0.59) at 12x FY10F PER. We are maintaining our BUY call and will be incentivised to re-peg when student enrolments exceed our expectations.

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