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RHB maintains MindChamps at 'buy' as it positions for future growth

Samantha Chiew
Samantha Chiew11/12/2018 12:19 PM GMT+08  • 2 min read
RHB maintains MindChamps at 'buy' as it positions for future growth
SINGAPORE (Nov 12): MindChamps on Thursday announced 3Q18 earnings increased by 13% to $1.12 million, compared to $0.99 million in 3Q17, bringing 9M18 earnings to 2.72 million, 15% higher than the year before.
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SINGAPORE (Nov 12): MindChamps on Thursday announced 3Q18 earnings increased by 13% to $1.12 million, compared to $0.99 million in 3Q17, bringing 9M18 earnings to 2.72 million, 15% higher than the year before.

Revenue for the quarter was 74% higher at $9.17 million from $5.27 million a year ago, due to a decrease in non-recurring franchise income; an increase in school fees, resulted from the increased number of enrolled students following the acquisitions of preschool centres in Australia and Singapore; and an increase in royalty income, from the addition of franchisee-owned franchisee-operated centres.

Other income more than tripled to $1.04 million from $0.30 million last year.

Following the results announcement, RHB is reiterating its “buy” call on MindChamps with a target price of 87 cents.

Despite a 74% surge in 3Q revenue, earnings only saw 13% increase, as margins were largely eroded by a higher cost structure of the newly acquired schools as well as the set-up costs for new teams to manage overseas expansion.

In particular, the group incurred $1.2 million in EBITDA loss for its Australian franchise and corporate segment to manage potential franchisees in that region.

See also: UOB Kay Hian upgrades First Resources to 'buy' as it expects to see its highest-ever yearly profit in 4QFY2022

Meanwhile, the group’s management said that it was able to reap efficiency of scale after the opening of its first 10 preschools in Singapore.

In a Monday report, analyst Juliana Cai says, “Given that the group has completed the acquisition of 11 preschools in Australia, we believe the bulk of the set-up costs has been put in place; a q-o-q increment in admin costs has also slowed. As such, we believe the cost increment should normalise and future acquisitions or appointment of franchisees in Australia would help to improve margins.”

Moreover, the group’s management said that it already has a team in place in China. Hence, the analyst does not expect costs to run up as aggressively in FY18 when the group commences its operations in China.

See also: RHB identifies GoTo’s road to profitability in an unrated report

In Malaysia, the group has appointed a master franchisee, which targets to launch 20 MindChamps preschools by 2024, with the first to be opened in Johor Baru by end-2019.

“We expect the appointment of the master franchisee to provide one-off franchise license fee for 4Q18,” says Cai.

As at 12.15pm, shares in MindChamps are trading at 63 cents or 2.3 times FY19 book with a dividend yield of 1.7 times.

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