Brokerage UOB Kay Hian has raised its price target on New Oriental Education & Technology Group (EDU) by 25% after the China-based education and after-school tutoring group unveiled its fourth quarter earnings.
The company reported a 23% year-on-year increase in fourth quarter revenues, while net operating income rose 40% from the same time last year. Full year revenues rose 22% year-on-year and operating income rose 32%. Student enrollments grew 33% in the fiscal year.
Investors were also rewarded with a special dividend of $0.45 a share, while management said it expected first quarter 2018 net revenues to post year-on-year growth of between 17% and 21%. Here’s UOB Kay Hian’s take on the guidance:
1Q is seasonally a weaker quarter for EDU. This suggests that FY18 revenue growth could be higher than 20%. We are expecting revenue growth of 26.8% for FY18. EDU also is expecting to increase new K12 learning centres by 10-15% and plans to enter 2-4 new cities in FY18.
UOB Kay Hian reckons the stock is well positioned to benefit from the consolidation of the after-school tutoring market (AST):
Revenue from K12 AST contributed about 55% of FY17’s total revenue. Given the uncertainties relating to the clean-up of the AST market by local authorities, parents and students may register for courses with companies with strong branding and good track records. We believe EDU will be among the brands that will benefit from the consolidation of China’s K12 AST market and its K12 business will continue to be a main growth driver. In our earnings estimates, we are expecting overall enrolment growth of 34.0-34.5% for FY18-20. Every 5% increase in enrolment growth will translate into an additional 2.8- 3.0% growth in net profit.
The broker, which rates the stock a buy, raised its price target to $99 a share from $79 a share. The stock last traded up 0.3% at $80.70 a share. The stock is up 92% this year.