Raffles Education: The worst is over

Weak 4Q09 results, below expectations. mainly due to S$6.7m tax expenses relating to the disposal gain of OUC’s land and S$8.4m of withholding tax. Both are one-off items, including disposal gain of $19m from OUC’s land sale. Excluding these, operating profit for 4Q fell 73% to $6.3m, on account of a 28% yoy drop in sales and 31% rise in personnel expenses. Operating margin more than halved to 14%.

Expect margin recovery in FY10. FY09 revenue increased by 6% to S$202m, driven by 10% y-o-y increase in student population to 32,828. However, operating profit for FY09 fell 10% to $68m, operating margin declined from 40% in FY08 to 34% in FY09. We expect a rebound in operating margin, as top line is expected to resume its growth momentum from FY10 onwards, as management focus on organic growth of its existing schools, amid more favorable economic conditions.

Management targets to list OUC before FY1Q11 OUC contributed 15.6% and 21.2% to the Group’s revenue and net profit, respectively for FY09. The IPO proceeds of OUC will be used to address the Group’s RMB895m of deferred payment obligations in 2012 and 2013.

Cut earnings and TP to S$0.68. We trimmed its FY10 top line by 12%, and net earnings by 4%, on account of the disappointing 4Q core results. TP cut to 68cts, still based on 18x FY10F earnings, pegged to regional peers’ average. Maintain Buy, the worst is over for the Group, amidst tough operating conditions last year, and it is now poised for an upturn, with incremental contribution from OUC. The company did not declare any dividends for FY09, despite its net cash position of S$115m as at June 09, post recent placements.

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