Post Reply
1-3 of 3
 | |||
|
A one-man money making machine
By TEH HOOI LING Published February 10, 2007
IN JUST three short months, one man has 'created' a whopping $1.3 billion from the market through his corporate activities. That man is Chew Hua Seng, executive chairman and chief executive of Raffles Education Corp (REC).
On Dec 1, REC announced that it had agreed to acquire 33.5 million shares of Oriental Century Ltd (OCL), or 20.16 per cent of the company, for 51 cents a share. The purchase price of $17.1 million valued OCL at 13 times its FY2005 net earnings. One month prior to the announcement of the deal, OCL had a market value of $73 million. After the REC deal was announced, OCL's market value shot up to $143 million. Yesterday, the market was valuing the company that provides education management services to educational institutions like kindergartens and senior high schools in China, at $272 million. Perhaps the market was counting on Mr Chew to do what it did with Hartford Education. Back on April 19, 2004, REC bought a 60 per cent stake in Hartford for $8.64 million. Over the following two days, Hartford shares surged 80 per cent. Compared with its price a month before the deal was announced, Hartford's market value had risen 128 per cent. Yesterday, Hartford's share price was nearly 11 times that of mid-March 2004. In August 2004, a few months after Mr Chew bought into Hartford, the group reported a full-year loss of $770,300. This compared with a net profit of $894,300 for the year ended June 30, 2003. For the six months to Dec 31, 2006, Hartford turned in a net profit of $780,000. A simple pro-rated annual earnings figure is $1.5 million. So, there is no doubt of the improvement in Hartford's performance. But the more striking thing is the market's valuation of that improvement. A $1 profit earned by Hartford under the previous management is valued by the market at about $16. Under the stewardship of Mr Chew, $1 of net profit is valued at some $130! The 'value creation' does not stop there. With its 60 per cent stake, REC gets to consolidate Hartford's earnings into its accounts. And there again, the same earnings are being valued at a significantly high multiple compared to that of a stand-alone Hartford. And so, what we've seen with Hartford is being played out in OCL. OCL's earnings, which REC acquired at a multiple of 13 times, are now being valued at 110 times. And while it is at it, REC has also managed to book an additional $4.36 million net earnings from its acquisition of OCL into its first-half results just announced yesterday. The market had got wind of the impending deal and had bid up the share price of OCL prior to REC's official announcement on Dec 1, 2006. So the 20 per cent stake for which REC was to pay $17.1 million was valued by the market at $21.4 million on Nov 30. Based on that, REC has deemed the 20 per cent stake in OCL it purchased to have a 'fair market value' of $21.4 million. So the difference of $4.36 million was included in its current first-half earnings as negative goodwill. But it has to be said that even without that $4.3 million, REC's net earnings growth was still an impressive 40-odd per cent year-on-year. Mr Chew has quickly followed up its OCL acquisition with yet another purchase this week. Yesterday morning, REC announced that it will buy 64.5 million shares in Easycall, or a 25 per cent stake, at 20 cents a share. REC is paying 12.3 times the annualised net profit before tax, minority interests and extraordinary items of Easycall, a higher learning education group listed on the Australian stock exchange and Singapore Exchange. On Wednesday, Easycall was last traded at 21 cents; and on Thursday, 26.5 cents. Yesterday, it ended at 67.5 cents. In one week, Easycall's market cap has more than tripled to $170 million. At the same time, REC's market cap has risen by $400 million this week. So the Easycall deal has created a market value of $520 million. Meanwhile, unrelated to REC, Mr Chew - together with Chua Leong Hin, Gay Chee Cheong and Gabriel Yap Chong Hin - announced their investment in Auston last month. Auston, another education company, will have a new business - that of a broadband TV service provider - being injected into it. In the last two months, Auston's market value has ballooned by more than seven times - from $16 million to $126 million yesterday. Taken all together, the market values of REC, Oriental Century, Easycall, Auston and Hartford have gone up by a staggering $1.3 billion since Nov 6, 2006. The earnings track record of REC has been unrivalled since its listing in 2002. And indeed, the group has a good story to tell, having been able to tap into the booming albeit highly competitive education market in China. In its last financial year, REC raked in a net profit of $32.3 million. That's a compounded annual growth rate of 74 per cent a year over the last four years. Shareholders who have placed their money and faith in Mr Chew in the last four years have been phenomenally rewarded. A sum of $10,000 invested then has risen in value to $1.3 million today. Not only that, the investors would have received $7,844 of that original $10,000 back in dividends. In other words, their capital exposure is only $2,156 out of the initial $10,000 invested, and that $2,156 has a market value of $1.3 million today. Given that kind of track record, many would be loath to bet against Mr Chew. However, the sharpest rise in REC's value has taken place in the last three months or so - much of that triggered by news of acquisitions. When so much 'wealth' is created in such a short time just by shuffling papers from one company to another, one has but to take a step back and question how that is possible - even for a company with REC's impeccable record. Perhaps, there is a grander plan which is being executed which many of us who are not privy to the insiders' thinking are still in the dark about. REC could be gobbling up all the smaller players, and hence paving the way for it to become one of the biggest private education providers in Asia. Even then, there will be execution risks. For one thing, there is a very long list of institutional investors in REC, the likes of T Rowe Price, Eaton Vance, Wasatch Advisors, Charles Schwab International and Fidelity and many more. If we take it that they are smart and that they have reasons to stay invested in REC, then it is possible that we are missing the big picture. We will just have to wait to see if indeed Mr Chew can deliver on the very high expectations the market has of him and his growing stable of companies. The writer is a CFA charterholder. She can be reached at hooiling@sph.com.sg | |||
