SINGAPORE (Aug 21): RHB is maintaining its “buy” call on MindChamps Preschool with a lowered target price of 94 cents, mainly due to a lower sector valuation.

In a Tuesday report, analyst Juliana Cai says, “We believe MindChamps Preschool’s soft 1H18 results were largely due to seasonal factors, as student enrolment numbers were lowest in 1Q18 after the previous year’s graduation.”

See: MindChamps 2Q earnings double to $1.3 mil on higher revenue; to acquire 2 preschool centres in Sydney

However, the analyst believes that this should ramp up across 2H18.

Meanwhile, the group’s administrative costs at the headquarters level have increased to support its overseas expansion plan.

The analyst remains positive on 2H18’s outlook, as the growth in administrative cost should taper off after the initial set-up stage of the overseas schools, while revenue and operating leverage will improve on the back of increasing student enrolment numbers.

The group recently acquired four preschools in Sydney, Australia in its second batch of acquisitions.

See: MindChamps acquires 4 preschool centres in Sydney for $13.1 mil

In its first batch of acquisitions in Nov 2017, the group acquired its first four preschools, which contributed about $1 million to total EBIDTA in 1H18.

“We expect the second batch to contribute EBITDA of a similar level as the first batch of preschool,” says Cai.

Earlier this month, the group announced another two acquisitions in Sydney, which will bring its total preschools in Australia to 10 by end-2018.

In addition, the group’s management intend to acquire preschools in China, through the China Preschool Fund, this November, marking a slight delay from its original guidance of August.

The analyst has not factored in any royalty income from the acquisition of China franchisees and believes that the sale of the first batch of 30 franchise licenses to the group’s master franchisee in China is likely to bring a strong one-off franchise income.

Nonetheless, Cai remains positive on the group’s 2H18 outlook and expects results to show wider margins, stemming from higher revenue growth and better operating leverage.

As at 11.45am, shares in MindChamps are trading at 70 cents or 2.7 times FY18 book with a dividend yield of 1.1%.