Purchase of Overseas Education Ltd

OFS logo
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.

OEL's 5Y Financials                                                      *Taken from FY13 Annual Report
OEL's Enrolment                                                   *Taken from Company’s website

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.

 

 

Divestment of Challenger Technologies

ChallengerMusicaValore

On 8/8/14, I divested my shares in Challenger Technologies at a price of $0.50. Including the $0.0142/share dividends received for the last quarter of 2013, the total loss on this investment is -11.14%. My reason for divesting is because both revenue and earnings had fallen by 10% and 28% respectively in 2Q14 from 2Q13. This set of results follows a bad 1Q where revenues and earnings were also lower from the previous year. Management has attributed this to lower corporate sales, higher operating costs due to rent and salaries although it was offset by a higher gross margin coming in from healthy sales from the Valore label.

I have been keeping a lookout on Challenger stores when I have had the chance. One thing I realise is that its Musica and Valore  concept stores do not seem to be having many customers. Moreover, I feel that the threat of online retail poses a bigger problem than its competitive strength – its large member base. As mentioned earlier, some of its products are still more expensive than its peers even after the member’s discount. I feel Valore products can also be easily purchased online under other brands. Nevertheless, it does show the innovativeness and willingness of management to make changes when challenges surface.

One key lesson I have learnt from this would be to study deeper about a company’s growth prospects and the challenges facing it. The financials of Challenger was very strong, but the business model required more study and analysis, something which I had looked over due to its robust financials.

The first year of my investing journey has been eventful, and with this divestment, has provided me with many learning opportunities, of which I am grateful for. Currently, my plan is to build up my cash holdings through saving to take advantage of weak sentiment in the market in the future.

An Introduction to CPF

CPF (Central Provident Fund) is Singapore’s social security savings plan for citizens old age. I will try to summarise the salient points that I have learnt while studying more about it in this post.

One’s CPF is made up of 3 main accounts – Ordinary Account, Special Account, and Medisave Account. A diagram explaining how the CPF works is shown below. The minimum sum that one currently needs when he is 55 years old is $155,000 in the OA and SA, and $43,500 in the MA. One will be able to withdraw excess savings at 55 after setting aside the minimum sum. Upon reaching the drawdown age, which currently stands at 63, he will start to receive monthly payouts.

CPFHowItWorks                               *Taken from CPF’s main website at http://www.cpf.gov.sg


Ordinary Account

Earns a risk-free interest of 2.5% per annum. This rate is based on the higher of the 12-month fixed deposit and month-end savings rates of the major local banks or the legislated minimum of 2.5%. Savings from this account can be used for housing, insurance, investment and education purposes.

Housing – It is important to note that for property purchases, savings can only be withdrawn till the valuation limit, which is the lower of the purchase price or market price. However, buyers must pay 5% of the valuation limit in the form of cash. Should there be excess installments which are yet to be paid despite the valuation limit being reached, one can utilise the OA account until the available housing withdrawal limit; which is the available OA account balance after meeting the minimum sum component. The maximum that one can use from his OA to pay off his mortgage cannot be more than that approved by one’s banks, which is usually up to 35% of one’s income.

Investment – If one has more than $20,000 in his OA account or more than $40,000 in his SA account, he is able to use the excess funds to invest. The range of investment options can be found on CPF’s website. One difference to highlight between investing from one’s OA and SA is that the savings in the OA can be used to invest in stocks while those in SA are not allowed to.

Education – One is allowed to use funds in his OA account to pay for his tuition fees. The amount withdrawn has to be repaid in cash, along with interest accrued.

Special Account
Earns a risk-free interest of 4% per annum or the 12-month average yield of 10-year Singapore Government Securities (10YSGS) plus 1%, whichever is the higher.

The funds in SA is usually used for old age and investment in retirement-related financial products. It is important to note that it cannot be used for housing purposes.

Medisave Account
Savings here can be used for hospitalisation expenses and approved medical insurance, ie. Integrated Shield Plans under private insurers, and one’s Dependent Protection Scheme (DPS).

 

As part of the government’s efforts to enhance the retirement savings of CPF members, an additional 1% per annum will continue to be paid on the first $60,000 of a member’s combined balances, with up to $20,000 from the OA. This works out to be 3.5% per annum earned on the first $20,000 in a member’s OA, and 5% per annum earned on the first $40,000 (up to $60,000 if no OA savings) in a member’s Special & Medical Accounts (SMA) and Retirement Account (RA).

One is allowed to transfer funds from the OA to the SA account. However, the amount in one’s Special Account must not exceed the current CPF Minimum Sum after the transfer. This will allow one to build up your retirement savings, and enjoy the higher interest rate of the SA at the same time. A key point is that once funds are transferred, they cannot be transferred back. As such, careful consideration needs to be made, especially if there are uses for the funds in the OA, eg. housing. The member can top up his SA account and enjoy tax relief of up to $7,000 per calendar year, if he uses cash to make the top ups.

This is a brief summary of the CPF scheme as I wanted to keep the post short and simple for now. For more information, one can check out the CPF website at http://www.cpf.gov.sg or the Ministry of Manpower (MOM) website at http://www.mom.gov.sg/employment-practices/employment-rights-conditions/cpf/Pages/default.aspx.