Posted by: donmihaihai | December 8, 2008

A look at Raffles Education Corp

The annualise returned for Raffles Education in share price alone is about 81% from the IPO price of $0.00875(Adjusted for all splits and bonus issues)in Jan 2002 to last Friday closing price of $0.55. This does not include another $0.16 cents collected through dividends payment and extra shares through acquisition of Harford which REC shareholder got it earlier from REC as dividends in specie. Of course, one of the reasons that REC generated extraordinary return is increase in valuation as REC was valued at PE of 7X during IPO compare to 17X currently. Another reason is REC having a Net profit CAGR of 66.5% since 2002. Not to say the $0.16 collected from dividend. It is hard to find another company able to generate this kind of shareholder value again and the chances are, not even REC itself can do half as good going forward.

The 1st sign that surfaced out recently was the scrip dividends scheme well to conserve cash. Some investors may like it but it doesn’t hide the fact that with the way REC operates, sooner or later, REC is unable to maintain their high level of dividend payout. There is two simple ways to look at it.

1st : REC NPAT from 1999 to 2008 added up to $200 million. Cashflow from operating activities from 1999 to 2008 added up to $163million. Dividend payout from 1999 to 2008 added up to $133 million. With free cashflow of $30 million after dividend payment, there is no way REC can finance capital expenditure of $362 million over the years, especially with $ 326million spent in FY2007 and FY2008 except by issuing of new shares.

2nd : Looking at FY2008 financial statement, with NPAT of $76million(adjusted for one off item) and cashflow of $51 million, REC had total tangible Assets of $703 million, NTA of $168million but liabilities of total $534million. It looks even worse off when all the commitments that REC entered into for it and haven’t appeared in the B/S add in. REC can’t grow it way out of this situation while still paying 80 to 100% of it operating cashflow. Impossible.

REC was at the sweet spot after listed in 2002 — rich valuation and use that as currency for purchases to fuel growth. In fact the acquisitions gather pace in the last 3 FYs and REC was getting with increasing confident that not just the acquisition getting bigger, it was getter faster as well and with the same theme — buy 1st then issue new shares to the public later. This basically blow REC results away, especially for the last 2 to 3 years but it also delivered a blow to REC that after a series of acquisitions and their biggest on OUC, the window for cheap fuel closed as REC share price slumped together with the market. REC is stuck.

With the current depressed stock market, the chances are, rich valuation is out of question, that say aggressive acquisition monster of REC is put into sleep, unable to take advantage of depressed valuation of any other listed education institutes to fuel further grow. But with what REC had done for the last few years, especially on the acquisition of OUC, Heifei Wanbo and Lanjing, Shaanxi Electronic Information Institute, Tianjin University of Commerce Boustead College and Shanghai Zhongfa, REC has lot of room for growth even without any new acquisition. It is exciting time for REC.

While REC started as a design college, it has changed largely due to its acquisitions which include

1) Raffles KVB Design Institute Pty Ltd, 2) Hartford Education Corporation Limited, 3)Path Education Corporation Pte Ltd, 4) Hartford Institute (New Zealand) Ltd, 5) Raffles Design Institute Limited (formerly known as The Mac Club Limited), 6) China Education Limited (formerly known as EasyCall International Limited), 7)Shanghai Zhongfa Education Investment Co., Ltd, 8 ) Oriental University Development City Co., Ltd (“OUC”), 9) Heifei Wanbo and Lanjing and 10) Shaanxi.

With these acquisitions, another issue surfaced which is transparence. Basically REC just commented that everything is working well or never talk about it later on which is not the case. Well, some can be dig out from note to accounting are

1) The acquisition of Raffles KVB Design Institute Pte Ltd is still in dispute. Quoted from FY2008 notes to financial statements 29.

The final consideration for the purchase of the business of KVB Visual Concept Pty Ltd in financial year 2005 is still under dispute. The acquisition has been recorded at the minimum likely consideration of A$6,156,000, resulting in goodwill of A$5,483,000. If the final purchase consideration exceeds A$6,156,000, the goodwill and amount due to the vendor will increase. This may result in goodwill exceeding its recoverable amount and the excess will have to be expensed as impairment.

What is happening there? Who is running KVB Design Institute? It is more than 3 years already.

2) Path Education Corporation Pte Ltd arbitration proceeding is still ongoing? Quoted from FY2007 notes to financial statements 26 a)

As at 30 June 2007, the Company was involved in an arbitration proceeding with the vendors of the acquired subsidiaries in relation to the quantum of purchase price of these acquisitions. Only upon the balance of the purchase price becomes probable and can be measured reliably, the difference between amount already paid and the subsequently agreed final consideration will be treated as an adjustment to goodwill on acquisitions.

In FY2008 notes to financial statements 6 (l) referring to Path Education.

The cost of investment of these subsidiaries is subject to adjustment upon the finalisation of the on-going litigation/arbitration proceedings between the Company and the vendors.

And note 9)

During the financial year 2008, impairment of goodwill of $115,000 (2007: $Nil) was recorded in the income statement as certain subsidiaries of Path Education Corporation Pte Ltd ceased operations during the financial year.

Now what is going on there which may or may not result in the impairment of goodwill? Nothing is provided but one thing possible indication is revenues for Australasia dropped from $14 million in FY2007 to FY2008 $11 million. Something doesn’t sound right.

3) Beside that, there is another dispute on Raffles Design Institute Limited (formerly known as The Mac Club Limited). Quote from Note 28.

As at 30 June 2007, the Company is in dispute with the vendor of this acquired subsidiary in relation to the purchase price of the acquisition. Upon the final resolution of the dispute, the goodwill and the amount due to the vendor will change. The allocation of the total purchase price is preliminary as at 30 June 2007 and is subject to modification.

It is surprising that trade and other receivables were reduced from 383K to 21K during fair value recognition. Wow, trade and other receivables are worth less than 10% of what original recorded? And in FY2008, it is still under dispute.

4) Lastly is regard to the acquisition of acquisition of assets and subsidiaries of Oriental University Development City Co., Ltd (“OUC”). At first I thought that REC is aggressive in the accounting for the acquisition but after digging for a while, my head go spinning. I don’t know what is happening there. Either I don’t have the ability to understand it or simply REC does not want other to understand it.

Beside these, I think REC is getting aggressive on their accounting as they start to put intangible assets on acquired student population for Heifei Wanbo, Lanjing and Shaanxi. I don’t know what is the use of that except that it strengthen their B/S which REC need it badly but anyone who look more in dept with know what are these. What more REC need to amortise them. Now if student population can justify as intangible assets, then what about company with long term contract, long term customer? Anyone can ‘pop’ some intangible assets out. Beside this, REC is also aggressive on their goodwill until FY2007 by using growth rate of 30% which they claim that it is the long term average growth rate for this industry. 30%? Wow, without acquisition can REC grow 30% annually? Can all their acquired companies growth 30%? If so tree grows into the sky. Anyway 30% was not longer being used in FY2008. What is changing?


The recoverable amounts are determined by applying discounted cash flow model using cash flow projections based on financial budgets and forecasts approved by Directors of the Company covering a five-year period, based on past performance and their expectations of the market development. The pre-tax discount rate applied to the cash flow projections is 5% and reflects specific risks relating to the business segment and cash flows beyond the one-year period and extrapolated using a 30% growth rate that is the same as the long-term average growth rate for the industry.


For value-in-use calculations, the recoverable amounts are determined by applying discounted cash flow model using cash flow projections based on financial budgets and forecasts approved by Directors of the Company covering a five year period and an estimated terminal value at the end of the five-year period, based on past performance and their expectations of the market development. The pre-tax discount rate applied to the cash flow projections is 5% (2007: 5%) and reflects specific risks relating to the business segment and cash flow beyond the one-year period.

Despite being not the same REC after a series of acquisitions which push down ROE as not all educations are being the same, as a whole REC is still a wonderful business to own BUT it is not longer enough to look at the 3 statements of P&L, B/S and cashflow because the meats are in the notes to financial statement. If anything that going to kill REC, it will come from there. And never underestimate the risk REC is facing as it go gun blasting into China by buying up university after university with debts. How much tax REC is paying for their China profit? Why is it that REC can keep buying up these education companies? What kind of relationship does REC or Mr Chew has with the Chinese government that permits REC doing all these? Now if the Chinese government decided to chop off and implement new regulation with more restriction or disallowed foreigner owning their education institutes, REC will not only come back with their tail in between their leg but possible killed by their debts. Let not forget education is a sensitive area in China.

But at a price I will take the risk. But at what price?


  1. Excellent article. Covers the important issues with depth.

    They should purchase the entire or majority of OCL to boost their reported profit. I am eagerly looking forward to that.

  2. Thank you.

    perhaps so…With the history of paying higher and higher price for acquisition on OCL, Easycall and Hartford. If REC is preparing to do it in the current situation, I guess they already make the move as OCL is trading at a much much lower price.

    Looking forward to read OCL.

  3. Good article written with good insights! Was actually thinking of buying REC as a long term investment. Despite the risks highlighted, do u think at its current price REC is still a good investment?

  4. Astute observations. Thank you for your generous sharing of such interesting insights into a potentially dubious company. Excellent real life lessons.

    Companies that exhibit the slightest sign of questionable accounting and integrity may only mean the tip of the iceberg: Putting student population as “intangible assets” makes zero financial and business sense, smells like something’s cooking! Call me an unevolved caveman investor, but I will never even smell the pot definitely!

    Looking forward to see how things unfold in due time.

  5. Thank you but I can’t decide for you and I don’t know it myself.

  6. Hi joe ong,

    You will if you are a shareholder or having REC closely to your radar and also willing to explore more than just the few lines of financial statements. In fact REC openly announced which make it even easlier to detact if not there is always notes to financial statement. Serious investor can do better.

    Seriously with their auditor blesing and amortise within 3 years, nothing much can go wrong with that. It is the “why” REC want to do that is more important.

  7. I can see why one will wanna buy orient century. According to my calculations its net cash. Raffles is buying cash essentially.

  8. That’s a good detective work!
    I have more to add, i jus read a book called” A billion lessons” and thus can relate Raffles Education to a rollup situation(acquisitons of fragmented industries). This is risky as they may not reap any economies of scale,the pace is unsubstainable and tough times like now will hammer them.

    They have a department for acquisition which is unusual and a sign of problem ahead as we know acquisitions don’t often work,not to mention a string of acquisitions.

    Lastly, always beware of market darlings, they can turn into ugly duckling any moment.

  9. Hi Drizzt,

    Do you think REC can buy up 70% of OCL at cash level?

    By looking at the situation, I bet you can come up with few reasons why REC is not doing the most logical thing now — buy OCL.

    Hi cy,
    thank you. But I don’t like to generalise thing and in REC case, the fundamental of its business is very strong. If not with REC high level commitments and debts, which banks willing to lend them the money at current credit situation?

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