Raffles Education minus 10%

The first half is only 27% of consensus full year estimates. 2Q ended Dec’09 sales decline 13% yoy to $47.15mln, accelerating from 1Q’s 3% yoy decline and represents 8.5% sequential decline.

Management explained that the reduction in sales was due to reduction in the allocation of National Education School Students, as well as negative impact of
the global economic crisis.

Looking ahead, management expects to set up another 5 new colleges this year (in Ahmedabad, Chandigarh, Chennai, Hyderabad and Phnom Penh) and another 3 next year. Each new college is expected to incur start up losses of about S$1mln in the first year and another S$0.5mln in the second year before breaking even in the 3rd year. This suggests that near term earnings would likely remain under pressure due to the start up costs.

However, even at this price the stock is not cheap with annualized forward PE of 26x and price to book of 2x against annualized ROE of only 8%. Technically, the stock remains in an entrenched downtrend channel established since hitting its peak in late 2007.