SINGAPORE (April 23): UOB Kay Hian is starting coverage on Overseas Education Limited (OEL) at “buy” with a 46 cent price target, based on 10.4 times EV/EBITDA or a 15.4% discount to global peers’ 2019 average.

In an initiation report on Monday, analyst John Cheong says he deems the stock’s valuations attractive at its current 8.3 times 2019F EV/EBITDA and an 8.2% dividend yield.

Cheong views this yield level as sustainable due to OEL’s strong operating cash flows despite the recent relocation of its Orchard Road campus to Pasir Ris due to lease expiration.

Although the move has caused a “huge decline” in student numbers, he likes how OEL has kept its operating costs in check to result in improved EBIT margins and operating cash flows in recent years.  

“We expect 2019 to be the third consecutive year of recovery with net profit growth of 11.2% y-o-y, as the rate of decline in student numbers continues to narrow while significant cost savings from loan refinancing kick in. The revenue decline narrowed from 5.4% in 2016 to 4.5% in 2018 and we expect it to narrow to 3.1% in 2019 as OEL starts to establish its brand name at its new campus.” says Cheong.  

The analyst is expecting cost savings of around $3.3 million from the refinancing of OEL’s borrowings, and a further reduction of operating costs this year.  

“We believe the market has overlooked OEL’s track record in manoeuvring through challenging times, and its ability to maintain annual dividend payment of 2.75 cents per share and pare down debt at the same time. Further improvement in profitability track record and wider analyst coverage should help OEL rerate upwards,” he concludes.

As at 11:07am, shares in OEL are trading 1.5% lower at 33 cents or 0.98 times FY19F book value.