• Stay BUY with a new DCF-backed SGD0.83 Target Price from SGD0.87, 26% upside plus 2.2% yield.
• Since its IPO, MINDCHAMPS PRESCHOOL LIMITED (SGX:CNE) has done a series of acquisitions in Australia. As its IPO funds depletes at end-2019, the group plans to focus on ramping up its Australian preschools portfolio and expand further through a franchise network.
• Moving ahead, we expect Mindchamps Preschool to start reaping returns from its investments and see improving operating leverage.

Eight More Company-own-company-operate (COCO) Schools

• The completion of the latest round of preschool acquisitions in Sydney brings Mindchamps Preschool’s total number of COCO preschool centres in Australia to 19 (2018: 11). The total purchase consideration: AUD40.8m, of which 40% should be funded through previous IPO proceeds and 60% via bank borrowings at interest rates of < 4%.
• According to management, the valuations for these eight preschool centres were below 10x P/E, hence, the acquisition should be earnings accretive to the group.

What Comes After Acquisitions?

• Management estimates that Mindchamps Preschool’s IPO proceeds will deplete by the end of the year. Post 2019, earnings growth should largely be derived from rebranding of the acquired preschools in Australia, growing student count per centre, and improving cost efficiencies.
• Mindchamps Preschool will also be looking to expand its franchise to Australia. This ought to help build the preschool network and brand name in the country.
• Earnings from the franchisees should also help to improve Mindchamps Preschool’s overall margins and profitability.

Change in Forecast

• According to management, the adoption of Singapore Financial Reporting Standards 16 has negatively impacted its 1Q19 pre-tax profit by SGD90m (-15%). As a result, we cut our FY19F-20F earnings 7% and 11%. Correspondingly, our Target Price is lowered to SGD0.83.
• We keep our BUY call.

Source: RHB Invest Research - 17 May 2019