SINGAPORE (Oct 17): RHB Research is maintaining its “buy” call on MindChamps Preschool with an unchanged target price of 94 cents based on a blended valuation methodology comprising a target EV/EBITDA of 18 times, in line with the peer average, and DCF.

In a Tuesday report, analyst Juliana Cai reiterates her positive expectations of the company’s impending release of its 2H results, as she expects higher earnings on stronger student enrolment, contributions from the Australia preschools, and one-off gains from the sale of franchise licenses.

With MindChamp’s acquisition of six centres in Sydney in the year to date (YTD), Cai highlights that its total number of preschools in Australia now stand at 10.

As such, she expects the new centres to contribute positively to 2H earnings as the group continues to build its brand awareness in Sydney.

She also expects the group’s sale of 20 franchise licenses under its newly appointed master franchisee in Malaysia to result in a one-off gain in 4Q18, in line with RHB’s full-year estimates.

“The master franchisee is expected to open 20 MindChamps preschools by 2024, with the first of these schools to commence operations in Johor Bahru in 2019,” notes the analyst.

Further, Cai believes MindChamps’ current pre-school fund structure, which enables the generation of multiple income streams from China franchisees, should help allay fears of potential losses from the acquisitions and rebranding of schools in the country.

This comes on top of the group’s plans to run two of its brands in China – the main brand, MindChamps and a sub-brand, Powered by MindChamps.  

“Over the longer term, we believe MindChamps’ ability to leverage on preschool funds to acquire franchisees allows the group to generate multiple income streams with a reduced need for capex,” says Cai.

As at 10:05am, shares in MindChamps are trading 1.5 cents higher at 62 cents or 2.44 times FY18F book.