Bull Stock: Raffles Education 1 comments

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Over the last five years, the top performer on the SGX has to be Raffles Education. It is a prime example of the bargains that one can pick up among the small caps which are always badly hit in a recession, and illustrates the wisdom of those timeless adages "buy-and-hold" (when done intelligently) and "let your profits run". It has opened my eyes to the massive rewards and long-term competitiveness that a strong position in a niche industry can bring.

Raffles Education, formerly known as Raffles Lasalle, enjoys that dominant niche in the China creative design education industry. It derives about 60% of its education revenue from North Asia, primarily China, where it operates eight design institutes in major cities like Shanghai and Beijing, up from four in 2002 when it listed on the Sesdaq (from which it has obviously moved out into the Mainboard since). In Singapore it now operates 5 design institutes, up from 1 in 2002. It also has grown its footprint into new Asian regions Malaysia, Thailand, India and Australia (the last via acquisition), and through its acquisition of locally-listed Hartford now derives about a quarter of its overall revenue from management courses.

If the numerical growth in the number of design institutes (ie. revenue centres) has been impressive (5 to 13 within 4 years or an annual compounded 25%), the financial performance has been even more impressive. Revenue has grown from S$15M to S$60M, an annual compounded 40% (and suggesting increasing student numbers at every institute every year), while profit has grown from S$4M to S$20M, an annual compounded 50% (suggesting increasing margins on base revenue ie. pricing power). That is simply breathtaking.

And yet there is something even more impressive than its financial performance, and that is its share price performance. Raffles Lasalle IPOed at 21 cents in Jan 2002; today it is trading at 1.80. But that is a massive understatement of price growth. Look at all the share splits/bonuses it has undergone over the years. 2:1 share split in Jan 2003, 1:2 bonus issue in Oct 2003, 2:1 share split in Oct 2004: that means outstanding shares has multiplied 6 times. An IPO investor who had held tightly to his Raffles Lasalle shares these four years would have multiplied his initial investment about 50 times, or an annual compounded 260%.

Well, this is the classic Philip Fisher growth stock. Not only did its strong business model earn it impressive year-on-year profit growth, but the market has kept on revaluing its fair trading P/E multiple. In 2002, the company was IPOed at 7 times trailing PE. Over the years the market has increased this to a current >40X P/E today. That is the reason why share price performance has outperformed profit growth by so much.

One cannot help but compare the fortunes of Raffles Education with that of a former market favourite in the same industry, Informatics. The failures of Informatics, of course, has been well-documented. Its IT education model slowed after the dot-com boom and it was followed by bad debts and aggressive accounting which ultimately dragged its hard-built brand equity through the mud. Reputation, more than anything, is what makes or breaks a service provider in service-oreinted industries such as healthcare or education. But Raffles Education is one stock I wouldn't dare to put on my hotstocksnot blogsite anytime soon, simply by virtue of its great track record as documented above. But then again, they say that the most unexpected decline starts when the last bear is gored. So let's play it by ear.