Today, I’m going to do an analysis of Singapore-based Overseas Education Limited (SGX:RQ1) which I think is awesome. The company operates a leading private foreign system school in Singapore. The company trades on the Singapore stock exchange with the stock code RQ1. Overseas Education earns tremendous returns on capital, has a strong balance sheet and is reasonably valued. The company’s stock price is currently at Singapore Dollar (S$) 0.81. I personally intend to pick up some shares in Overseas Education in the near future.
Based on trailing 12- months net profit of S$23.207 million, Overseas Education achieved return on assets and return on equity of 13.29% and 16.44%, respectively. These are spectacular returns on capital considering that the company has large cash holdings. As at Sept. 30, 2013, the company had S$113.908 million in cash and fixed deposits, but it only had S$33.451 million in total liabilities. I understand that the company has recently awarded a contract with a contract sum of S$233.508 million for the building of the new school campus. However, with the company’s solid balance sheet and steady profits, I don’t think that it will end up with significant financial risk.
The hallmark of a good business is its ability to raise prices; just ask my main man Warren Buffett. Overseas Education managed to increase tuition fees by 8% to 15% across the school for the academic year that commenced in August 2012. The company increased tuition fees by approximately 8.5% on average across the school for the academic year commencing August 2013. Overseas Education is almost at full capacity at its current campus. I think that one of the main reasons for the company’s strong performance is its ability to help its students achieve good results. According to Overseas Education’s 2012 annual report: “Over the past three academic years, the percentage of our High School students who obtained 35+ points (which would generally require the students to have obtained a majority of at least six ‘A-’ grades and above), was consistently above the world-wide percentages of DP students.” In the company's Diploma Programme, 36.7% of candidates achieved 35+ points in academic year 2010/2011, compared to 22.6% of candidates worldwide.
I think that Overseas Education’s future prospects are pretty good. I assume that the company would no longer have to pay school lease rental costs when it moves to the new campus. School lease rental was S$6.827 million in 2012. The new campus will also have increased student capacity which could result in the company generating higher revenue and profits if it can get more students to enrol at its school. The main risk I see for the company is that it might issue new shares at a significant discount to market value to partly fund the new campus; such an action will of course cause dilution to existing shareholders. Another risk I see for Overseas Education is that the development of the new campus might not be completed on time. From my understanding, the company would have to pay a project completion period extension premium if it can’t complete development of the new campus within a certain period (you can read more about it here; it’s only two pages). The company would also have to find somewhere to rent temporarily which would result in rental expenses being incurred.
I’m not saying that any of the risks discussed will materialize. The potential risk events are just something that could happen, but investors should still think about them before investing in the stock.
Based on Overseas Education’s 415.364 million shares outstanding, the company’s trailing 12-months earnings per share would be around S$ 0.055. This would result in the company currently having a price-to-earnings ratio of 14.72 which I think is reasonable considering that the company generates high returns on capital and has low financial risk.
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