Raffles Education – Humble valuations despite superior track record

Following our recent non-deal roadshow for Raffles Education in Tokyo, our comfort level has improved. While acquisitions have slowed, RLS will steer its focus towards organic growth, targeting an annual growth rate of 10-15% in student enrolment.

There is plenty of room to maximise the value of OUC by acquiring some of its existing 14 colleges, adding colleges and increasing fee income. Apart from receiving service fees, the group has added 2 schools that will commence their first student intake in 1H10. OUC has contributed returns of $62m since acquired in 2007. In 5 years, RLS targets a student enrolment of 100 000 in OUC. Earnings potential from OUC alone could go up to $200m per year, double the group’s existing core earnings.

The group has made its foray into India 3 years ago with Mumbai and now have a JV with India’s largest education provider – Educomp. India, with the largest population of young people in the world, will be an important growth engine for RLS. The group plans to set up two colleges in India every six months. At the fast expansion pace, the group expects India’s contribution to match its China operations in 5 years’ time.

RLS has been delivering value for its shareholders with a total share price return of ~75x since IPO. While there are sceptics about its regular equity financing, we note that RLS has been enhancing its firm value, evident in its 7-year core earnings CAGR of 63.5% and superior ROE. Aside from the placement proceeds, the bulk of the funding for its acquisitions and dividends came from strong cash flow generated internally.

RLS stands out as one the cheapest listed education stocks with an established brand name and superior margins. As most of its schools are below five years in operation, margins could improve to above 70% when the schools operate with sizable student population beyond 8 years. Along with its strong cash-generative business and easing debt burden, we expect the group to resume its dividends payout by end-2010. Maintain BUY.

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