SINGAPORE (May 9): RHB Securities is maintaining its “buy” on MindChamps Preschool despite 1Q18 results coming in below estimates on seasonal effects and higher operating costs from expansion.
“We expect revenue and earnings to catch up over the next three quarters – as its student count increases, and the Woodlands MindChamps Preschool and four new Australia preschools’ accounts are consolidated into the group’s numbers,” says analyst Juliana Cai.
To recap, MindChamps’ 1Q18 revenue rose by 36% y-o-y, due to the consolidation of its four Australia preschools that were acquired in Nov 2017. However, MindChamps felt the impact of seasonal changes that affected student enrolment numbers.
See: MindChamps reports halving of 1Q18 earnings to $0.34 mil
“Typically, the first quarter records a lower number of students, due to the graduation of K2 (kindergarten level 2) students at year-end. As such, the quarter features narrower margins, as its operating leverage decreases,” says Cai.
This is exacerbated by the increase in administrative costs incurred by the new centres, as well as the higher headcount taken to support the group’s business expansion overseas although it is understood that the bulk of the increase in staff for corporate functions was done in 1Q18.
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“We expect the increase in administrative costs to taper down q-o-q. Administrative costs as a percentage of revenue should also decline as its student count and school fees increase over the next three quarter,” says Cai.
Cai also expects its new acquisitions to contribute positively. "The acquisitions made in 1H18, ie Woodlands MindChamps Preschool and the four preschools in Sydney, should also have a positive impact on group earnings upon their consolidation in the group’s accounts.”
Looking ahead, MindChamps is expected to launch its China preschools in August. If this materialises, Cai believes it would lead to a further upswing in its earnings.
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“Maintain ‘buy’ with a target price of $1.00 based on a blended valuation methodology that comprises 19 times FY18 forecast EV/EBITDA and DCF,” says Cai.
As at 11.15am, shares in MindChamps are trading at 80 cents.
