On 21/8/14, I bought into Overseas Education Ltd at a price of $0.97. Overseas Education, as its name suggests, is an international school for foreign students located in Singapore. In its annual report, it says that its master policy is to maintain a happy, safe and effective school for overseas families living in Singapore. It offers the K-12 International Baccalaureate (“IB”) curriculum within a globalised multi-cultural environment to children aged between 3 and 18 years of expatriate parents, who are senior executives and professionals working and living in Singapore. According to its website, the school has around 3,700 students of over 70 nationalities, supported by about 500 staff members of over 30 nationalities.
There are a few things I like about Overseas Education Ltd:
1) It has good pricing power, ie. it is able to raise tuition fees every year without seeing demand drop. Seeing that tuition fees make up majority of its revenues (~ 96%), being able to raise prices gives the company the ability to grow its earnings. The company earns the rest of its revenue through registration fees from new students, bookshop sales, enrichment programmes revenue and interest income.
2) Another thing I like is that the two founders, who own large stakes in the company (each owning around 32%), take home a modest salary w.r.t to the company’s size as compared to founders of many other companies. According to the 2013 annual report, the founders reportedly took home around $380,000 – $400,000 in a year. This gives an indication that the founders’ interests are aligned with those of shareholders.
3) Strong track record of growing revenues and earnings. Revenues and earnings have been growing at a CAGR of around 8% and 15% respectively in the last 5 years. CAGR of EPS is also around 15%, taking into account the enlarged share capital in FY13. The growth in revenues and earnings have been largely attributed to the dual engines of increasing enrollment and rising tuition fees. It is heartening to see that enrollments were not affected during the last crisis in 2008/2009, but instead grew. The company also generates strong cashflows yearly.
4) Positive growth outlook – The company is shifting to its new campus in Pasir Ris in 2015, which is expected to increase its capacity from 3,940 currently to 4,800, representing a ~22% increase. Moreover, information from a Kim Eng analyst report shows that the company’s tuition fees and student registration fees are below market rates. The new school campus with its new facilities give it room to command better rates in the future.
5) Ultimately, the corporate performance of the school would depend largely on its quality of education. In this regard, over the past four academic years, the percentage of High School students who obtained 35+ points (which would generally require the students to have obtained a majority of at least six ‘A-’ grades and above), was consistently above the world-wide percentages of diploma program students. In Academic Year 2012/2013, 32.1% of OFS diploma program candidates achieved 35+ points, compared with 24.3% of candidates world-wide.
The above points make me confident that OEL will continue to do well in the future. I believe that Singapore will continue to be the financial and education hub in Southeast Asia, and that more expatriates will be living and working here in the future, partly aided by government’s policies in growing the Singapore population. Parents are usually very particular about their children’s education and this is an area where they are not likely to scrimp on. I see OEL as a defensive stock that has the potential to grow.
Nevertheless, there are still risks that one needs to be aware of. The moving of OEL to its new campus in Pasir Ris (eastern end of Singapore) might put off some parents although I feel that the location is highly accessible due to it being situated very near to an expressway. The new location is also very near to the beach, which may cause discomfort to some parents of little children. The response of parents can only be better verified when the school commences its operations there. Another risk would be the greater depreciation cost due to the new campus, which would hit earnings hard if the company is not able to grow its enrollment and fees. Last but not least, competition from other reputable international schools eg. United World College, Singapore American School, etc do pose a threat to OEL. However, research shows that the demand for FSS (Foreign System School) places is greater than the supply, both now and moving forward.
At my purchase price, the company is trading at a PE of 18 based on annualized 6MFY14 earnings and has a dividend yield of 2.8%. It seems that the market tends to award higher PE ratios to defensive stocks. The company has an ROA of 11.65% and an ROE of 15.42% in FY13. These are strong figures, especially since the company has alot of cash on its balance sheet. Although the company is relatively undervalued as compared to its peers which are mostly trading above a PE of 20, I would feel more comfortable buying it at a lower price. As such, my purchase is a small one for now.
Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.