Highly resilient in nature. With 23 years of track record, Overseas Family School (OEL) is ranked third in revenue size in Foreign System Schools (FSS). Armed with a fixed dividend policy payout of at least 50% earnings and a 3-year historical average FCF yield of 6.0%, OEL will benefit from a 22% increase in capacity in 2015 after the school moves to its new campus in Pasir Ris. In addition, we expect tuition fees to be raised annually in tandem with the capacity ramp up.

Targeted at a growing expatriate population. According to Frost & Sullivan, the FSS industry is expected to grow at an estimated 3-year CAGR of 8.9% on the back of its student population’s CAGR of 13.4% between 2013F and 2015F. OEL is one of the only 5 schools in Singapore which offers an extensive range of K-12 International Baccalaureate (IB) curriculum. A targeted 6.9m population by 2030 should also ensure a steady stream of expatriate families, in accordance with OEL’s buildup in capacity.

Capacity expansion in new Pasir Ris campus. In lieu of an expiry in rental tenure at its existing Paterson Road campus, OEL plans to shift campuses in August 2015 to a newly built campus in Pasir Ris. OEL will spend approximately SGD200m on constructing the new campus. So far, it has set aside SGD136m from cash savings and IPO proceeds, including an estimated savings of SGD20m in FY13 and FY14, the remainder cost of SGD64m will likely be internally financed. This will ease their capacity constraints as the capacity will increase by 22.2% to 4,800 students. OEL will also save SGD6.8m per annum from rental leases following the move.

Savour the dividend until catalyst kicks in. We expect flattish earnings in preparation for the move to Pasir Ris, given another rental hike on Paterson Road is due this July. Until then, assuming a 50% dividend payout, we estimate OEL’s dividend yield would be between 3.9% and 4.7% between 2013F and 2015F, supported by strong operating cash flow of over SGD20m per annum and highly visible capex plans.

Beyond Singapore in the long haul. Leveraging on OEL’s goodwill, the management expresses interest in entering China after the Pasir Ris campus opens, particularly second tier cities given the more affordable land costs and growing expatriate populations.

Source: Maybank Kim Eng Research - 9 May 2013