Raffles Education - Balance sheet shored up, OUC value creation up next

RLS's balance sheet has been strengthened by two placements in the last three months, which in aggregate raised S$130.9 mn in net proceeds, and reduced gearing from 44% to 7%. With funding issues addressed, RLS looks set to achieve a debt-free balance sheet ahead of its end-2010 target.

Management is targeting some S$60-70 mn in revenue contributions from Oriental University City (OUC) over the next 12 months, more than double our estimates. With growth primarily driven by education services, we see upside likely from further acquisition of NES colleges in OUC, and new PES schools.

We have lowered interest expenses, in line with reduced borrowings, and forecast 30% earnings CAGR through FY11E. However, including impact of dilution from the recent placement, our FY10/11 EPS forecasts are lowered by 4-7%.

Given enviable growth and profitability metrics, RLS's valuations remain compelling at 11x FY June-10 P/E, at a 50% discount to its US-based peer average of 22x and a 39% discount to its Asianbased peers at 18x P/E. Maintain OUTPERFORM.

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