Raffles Education Corp diversification strategy starts to bear fruit.

Target price to $0.65

Near a turning point Higher dividend payout declared. Stripping out the one-off gain of $9.0m from the disposal of available-for-sale financial assets, Raffles Education Corp’s (REC) 2QFY Jun12 results were slightly below our expectations. Net profit fell by 10% YoY to $3.5m, dragged down by other operating costs arising from property and land use tax expenses of $2.2m during the quarter. Despite the uninspiring results, interim dividend per share was raised to 0.5 cents from 0.45 cents last year.

China issues largely behind us. Revenue contracted by 13% YoY in 2QFY Jun12 in the absence of contributions from Shaanxi Electronic Information Institute and the 50%-owned Zhongfa College (via Value Vantage Pte Ltd). This was because REC had earlier sold its interests in these investments – 100% and 50% respectively. Though the group’s student enrolment numbers in China remained weak on account of changing demographics and more Chinese students pursuing education overseas, the rate of decline has at least moderated.

Diversification strategy starts to bear fruit. On the bright side, turnover grew by 14% YoY in Asia Pacific (ex-China) to $16.7m, accounting for 45% of the group’s overall revenue. This result somewhat validated REC’s geographical diversification strategy as it pushed to build a pan-Asian platform through the establishment of 14 new colleges, mainly in India, over the past three years or so.

Raising the bar. REC recently announced that it has been awarded the EduTrust certification for four years by Singapore’s Council for Private Education. Under the new regulation, all private education institutions in the Republic must be EduTrust-certified in order to recruit international students. This has brought about a consolidation in the local private education market, resulting in fewer competitors for the group.

Buy with target price cut to $0.65. The stock currently trades near its NTA per share of $0.51, suggesting that investors are getting REC’s education business at a steal. Nevertheless, we lower our SOTP-based target price to $0.65, from $0.80, to factor in the lower-than-expected core earnings potential.

52 Weeks Range 0.400 - 0.975

Company Background
RafflesEducationCorp is the largest private education group in Asia. Since establishing its first college in Singapore in 1990, the Group has grown to operate three universities and 19 colleges across nine countries in the Asia-Pacific region: Singapore, China, India, Vietnam, Malaysia, Thailand, Mongolia, Australia and New Zealand. The Group also owns the Oriental University City in Langfang, Hebei Province, China - a 3.31 million square metres self-contained campus. Within this campus, there are 19 colleges with 57,000 students.