SINGAPORE (Mar 2): RHB Group Research has downgraded MindChamps PreSchool to a “neutral” from the previous “buy”, and has slashed its target price by 55% to 37 cents as the group continues to grapple with a rising cost environment. 

In its latest set of results for 4QFY2019 ended December, the group reported earnings of $5.9 million, up 60% from earnings of $3.7 million 4QFY2018. Revenue for the quarter increased 12% to $15.8 million on the back of an increase in school fees, which resulted from the increased number of enrolled students following the group’s acquisitions of preschool centres in 2018 and 2019. 

This had resulted in the group’s full-year earnings being lifted to $6.9 million, or some 9% higher than earnings of $6.4 million in FY2018. 

The new acquisitions proved to be a double-edged sword as the cost of sales surged 34% to $8.0 million on the back of higher academic staff costs incurred due to the increased number of staff. 

“Costs of running have increased much more starkly than revenue,” notes RHB analyst Juliana Cai in a Monday report. “This has resulted in poor earnings performance for FY2019. The lack of new master franchisees signed this year also contributed to lower income,” she adds. 

Cai noted that MindChamps had booked a gain from corporate transactions of $6.2 million due to the divestment of its subsidiary corporations in 4QFY2019 to franchisees on a turnkey basis. 

Excluding this divestment, the group would have booked a loss of $0.3 million in the very quarter that has seasonally been its strongest.  

Although Cai was previously optimistic on MindChamps’ venture into Australia due to the country’s higher average school fees compared to Singapore, she notes that the group’s student occupancy in Australia has yet to reach optimal levels. 

“As at end-2019, MindChamp’s Australian company-own, company-operate (COCO) preschools have an average of 58 students per school, while its Singapore COCO preschools have an average 103 students per school,” says Cai. 

“As a result, margins for its Australian operations have remained subpar,” she adds. 

Looking ahead, MindChamps is harbouring plans to strengthen its presence in Australia by acquiring more preschools and setting up its teachers’ academy and headquarters in Sydney. But Cai, for one, remains cautious. 

“We are less optimistic on the outlook given the likelihood of further costs escalation amidst these expansion plans, as revenue could take a longer time to catch up,” says Cai. 

However, Cai says that either the signing of a new master franchisee, or a divestment of the group’s COCO schools to a franchisee could rake in one-off gains for the group, which would in turn contribute positively to its earnings. 

As at 3.44pm, shares in MindChamps are trading 0.5 cent lower, or 1.3% down, at 39 cents.