Broker's View

Maple Leaf Educational shares rally as analysts upbeat on outlook following Singapore acquisition

PUBLISHED : Tuesday, 26 July, 2016, 11:21pm
UPDATED : Tuesday, 26 July, 2016, 11:21pm

China Maple Leaf Educational Systems could take an earnings hit this year with its acquisition of Singapore’s Lucrum Development, despite the optimistic market outlook for China’s leading international school operator.

China Maple Leaf Educational Systems said on Monday that it was acquiring Lucrum Development for about S$68 million (HK$388 million).

The principal asset of Lucrum Development is a school property located at 11 Hillside Drive in Singapore spread over 7,568.6 square meters. It currently comprises 30 classrooms, including a music studio, science labs and arts studios as well as a multi-purpose hall, self study room and design and technology room.

“We have tweaked our earnings estimates slightly downwards by 0.4 per cent in fiscal 2016, given the additional capex and interest expenses,” said Jennifer So Lai-shan, an analyst from China Securities International.

“However, we adjusted it upwards by 3.4 per cent for fiscal 2017 as the expected rental income from Lucrum will be booked as other income.”

The school property acquired by Maple is currently leased to an independent third-party school operator, K-12, whose lease is set to expire in October next year. The monthly rental for the property is about S$200,000, which translates into a gross rental yield of about 3.5 per cent for Maple.

The acquisition is expected to be completed by September this year, and Maple will regard it as an investment property under the current lease team.

“Upon completion and during the continuance of the lease agreement, we intend to hold the property as an investment property,” said Shu Liang Sherman Jen, the chairman of Maple.

“When the school property becomes vacant and the necessary licences have been obtained from the relevant authorities in Singapore for the operation of a foreign system school, we hope to open the first bilingual, bi-cultural Maple Leaf school in Singapore,” he said.

Maple said that one of its long-term strategies is to expand its bilingual and bicultural school network outside the mainland.

Terming the Singapore acquisition as beneficial to the group, it said it was a rare opportunity for the company to expand into Singapore and broaden its school network outside mainland China. “Singapore has a large expatriate population and a strong reputation for high quality education,” said Jen.

Share prices of China Maple Leaf Educational Systems has more than tripled in the past year. Its Hong Kong shares closed at HK$8.47 on Tuesday, the highest in a year.

JP Morgan raised it earnings estimate for the international school operator and has set a target price of HK$ 9.5 for the share.

“We have raised our sales assumptions for fiscal 2017 to reflect the slightly higher average sales price growth to factor in the new schools that are being located in wealthier cities compared to existing schools,” said Leon Chik, an analyst from JP Morgan.

The brokerage expects stable growth of schools and enrolment of students in the next two years.

“Considering that the company has added one or two new school contracts every month, we do not think it is likely they will stop adding new agreements after the last update in late May,” said Chik in his report. Maple reported an enrolment of just over 19,000 students by the end of March this year. It has set a target to lift enrolments to 40,000 students by 2020.

Chik said in the report that he is comfortable in estimating 43,000 enrolments by August 2020, after analysing the strong student growth achieved in fiscal 2015 as well as the first half of fiscal 2016.

“Maple intends to expand into new schools using the asset light growth model where local governments or property developers provide the buildings and Maple only provides fixtures,” said Chik. “This new approach allows it to expand its schools in a capital efficient manner, with real estate developers or local governments as partners.”