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Can Raffles Education Regain Its Market Darling Status?
In the Spotlight | 04 November 2010
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By: Xavier Lim
Articles (51) Profile

As middle class households increase, and income levels improve, especially in Asia whose economy is booming, there has been a spur in demand for higher education. Raffles Education Corporation (REC) seems to be well positioned to benefit from this growth due to its enlarged platform across Asia.

Let us take a Closer Look @ REC, the largest private education group in Asia-Pacific that has grown to operate 38 colleges in 35 cities across 14 countries in the Asia-Pacific region with more than 30,500 students enrolled in its tertiary programmes.

REC is one of the worst performing stocks, trading below its lowest closing price in Mar-09 when global equity markets hit rock bottom and have since rallied strongly. This was despite REC purchasing back its shares gradually, to improve its shareholders’ value by improving the return of equity, and numerous insider purchases. The poor performance of REC’s share price can be attributed to its lower than expected results in the last few quarters, causing most analysts to downgrade the company.

Bad things probably come in threes. Recently, REC was informed by ISS Holdings (ISS) that the proposed reverse takeover by ISS of Oriental Century (OC) will not proceed as both parties were not able to reach an amicable resolution after auditing ISS’ financial statements. REC owns 29.9% stake in the fraud-hit OC. However, this negative impact should not affect REC’s future earnings as it has written off $33.1 million allowance for impairment of investment in OC, as well as the loss of equity accounting arising from the investment in FY09.

Don’t Be Fool By Weak 4Q10 Results

In its FY10 financial statements, REC reported a marginal 2.8% increase in earnings despite revenue registering a 6.9% decline. However, excluding the $37.6 million government grant at Oriental University City (OUC), REC suffered its first quarterly net loss of $0.9 million since its listing in 2002, according to Credit Suisse’s report.

The weak results were caused by the impact of the global financial crisis and lower number of students in China taking the ‘Gao Kao’ (the trend of more students choosing to pursue education overseas) as well as high start-up costs for new colleges and higher allowance for doubtful debts and bad debts.

Looking at REC’s balance sheet, its working capital (current assets – current liabilities) has been negative since FY08. This was due to the setting up of 13 new colleges over the last two years, which was mostly funded through internally generated cash or borrowings.

Oh dear, this is terrible! If a company has negativeworking capital, it is unable tomeetits short-term liabilities withits current assets and may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy.

But wait! Let us delve deeper into REC’s financial statements. REC was able to generate positive and healthy net cash from operating activities of $59.7 million. It has cash and cash equivalents of $101.6 million with net gearing ratio stood at 0.13 times as at 30 Jun-10. In addition, REC has also generated close to $30 million free cash flow for its FY10 results. It is noteworthy that REC has continued to be profitable throughout the global economic crisis and not forgetting that the 13 new colleges’ setups will contribute to the bottom line after their typical gestation period of 2 to 3 years.

Expanding Into The Future

According to projections made by The Associated Chambers of Commerce and Industry of India (Assocham), the saving habits of middle class people for higher education of their children and the government’s plan to spend about 5% of GDP on education in next five years will double India’s education market size to US$50 billion by 2015. Currently, India’s education market size is estimated around less than US$25 billion, of which higher education market size is close to less than US$15 billion. Assocham expects the urban disposable income to rise at a CAGR of close to 6% and 4% in the rural area.

REC, which has embarked on a diversification strategy in the last two years, set up a total of 13 colleges outside China. REC owns the proposed Raffles Millennium University (RMU) in Greater Noida (a joint venture with Educomp Solutions) and other 8 colleges. They are all strategically located across India. REC has completed its first phase construction of RMU and is pending for all relevant regulatory approvals. RMU’s maiden student intake is expected by end of 2010. REC targets an enrolment of 15,000 students upon the completion of RMU in five years. Going forward, India will become the second key market for the group.

Australia is another important market for REC. It has submitted an application to the Western Australian Government to establish Raffles University College (RUC), a 2nd private sector university at Midland in Perth, Western Australia. This will increase REC’s market share of international students in Perth. “The total number of overseas students versus the total student population in Western Australian is lower than in Queensland, New South Wales and Victoria. There’s no way that Western Australian should not perform as well as, if not outperform, them,” said Professor Ron Newman, the president of Raffles University.

In March this year, REC announced to form a 80:20 joint venture with Education@Iskandar Sdn Bhd (a subsidiary of Khazanah Nasional Bhd) to launch Raffles University Iskandar (RUI) on a 65-acre plot of land in the Iskandar Development Region, 30 minutes drive from downtown Singapore. It is expected to commence operations at end-2010 pending licence approval, and is targeting to enrol 5,000 students within its first 5 years. RUI will offer industry-oriented programmes to meet both the manpower needs of Malaysia, Singapore and the international community.

Although REC’s FY10 revenue was dragged down by lower number of students in China taking the ‘Gao Kao’ and due to the initial reaction to the mandatory change of name of its Shanghai campus, from a design college to a training institute, China remains the key market for REC. This is due to the large population of the China market that cannot be ignored.

China continues to play a new and increasingly important role in the global education market as it has not only become a top source of education for overseas students, but also as a top destination. Amidst the growing trend of the Chinese sending their children overseas to pursue their studies, China government is making a concerted effort to attract more international students.

Investors may also want to take note that the China’s land reform regulations set for March 2013 dictates all schools have to be owners of the land they operate in. Hence, the investment in Oriental University City (OUC) in Langfang, China has become a necessity for REC to continue participating in China’s growth. Many of its competitors will be seeded out as the deadline approaches. More importantly, REC intends to list OUC by 31 Aug-13 on the Stock Exchange of Hong Kong, which is likely to create additional wealth for shareholders.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.

Raffles Education Corp  0.075 -- --   
Business: Co is the largest private education group in Asia-Pacific. [FY18 Turnover] Education (81.6%), education facilities rental service (13.6%), real estate investment (4.8%).

Insight: Feb-19, 1H19 revenue fell 0.3% to $48.7m due to ch... Read More


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