• Maintain BUY, new Target Price of SGD0.94 from SGD1.00 offers 34% upside. Our Target Price and call are mainly due to a lower sector valuation.
• Although the 1H contribution was soft vs our full-year estimate, we believe this was due to seasonal factors. Also, MindChamps incurred additional administrative costs to run the Australian preschools acquired in end-2017.
• Moving into 2H, we expect enrolment numbers to pick up, leading to faster revenue growth and better operating leverage. The six newly-acquired Australian preschools this year should also contribute positively to 2H numbers.

More Visibility in 2H

We believe MindChamps Preschool’s soft 1H18 results were largely due to seasonal factors, as student enrolment numbers were lowest in 1Q after the previous year’s graduation. However, this should ramp up across 2H. In addition, its administrative costs at the headquarters level have increased to support its overseas expansion plan.

However, we remain positive on 2H’s outlook, as the growth in administrative cost should taper off after the initial set-up stage of its overseas schools. 

Rising student enrolment numbers will also improve revenue and operating leverage. As evidenced by its 2Q18 results, q-o-q revenue growth has caught up with the sequential increase in administrative costs. We expect this trend to continue into 2H18, and margins to improve.

Source: RHB Invest Research - 21 Aug 2018