|Shares Out. (in M):||9,905||P/E||9.8||0|
|Market Cap (in $M):||6,735||P/FCF||0||0|
|Net Debt (in $M):||0||EBIT||0||0|
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Note: this is a company listed in the Philippines, not the United States (the country tabs on valueinvestorsclub.com didn’t cover this country so I left it as is). Apologies for adding this idea to the December VIC idea pile-up, but the stock price recently dipped below book value for the first time in a while so this seems as good a time as any to post it.
STI Education Systems Holdings (www.stiholdings.com) is the publicly listed holding company for 1) STI Education Services Group (STI ESG www.sti.edu, www.youtube.com/user/STIdotEdu), the largest and fastest growing publicly listed tertiary education provider in the Philippines, 2) West Negros University, a recently acquired provincial institution, and 3) an effective 20% stake in Philplans (http://philplans.com.ph/), a leading pre-need insurance company with significant investment float acquired from AIG in 2009. While it remains to be seen if the stake in Philplans develops into something special, we believe the tertiary education subsidiaries (especially STI ESG) have an opportunity to grow much bigger.*
Thanks to short-term regulatory risks facing the Philippine tertiary education industry that we’ll describe below, the PHP 6.7 billion market cap of STI Holdings today represents just 9.9x Mar-2014 P/E (including realized insurance profits), 9.8x Mar-2014 education-only EBITDA despite the fact that many newly built/acquired campuses are still ramping up to mature profitability, and 0.97x of Sep-2014 book value.**
STI Holdings is among the most interesting investment opportunities we’ve seen in 2014 because A) its core business of vocational education solves an enormous social problem that could enable it to grow significantly, B) it is owned/managed by an investor-entrepreneur with a public track record of value creation, and C) the entire company sells for less than estimated non-core asset value alone, giving investors at today’s stock price of PHP 0.68 per share the education franchise for free.
STI Holdings non-core assets sum of the parts guesstimate:
Treasury shares (at market value) + owned campus land/buildings (at historical cost verified by Colliers less 10% haircut) + insurance assets (at book less 20% discount) + off-balance sheet deferred tax assets (at book less 70% discount) + loan-to-own receivable controlling Philippine Women’s University (at book less 50% discount) = PHP 0.352bil + 4.716bil + 1.147bil + 0.479bil + 0.463bil = PHP 7.1bil vs. 6.7bil market cap
Education business track record:
2014: enrollment: 81,726*** revenue: PHP 1,918 mil EBITDA: PHP 690 mil assets: PHP 6,303 mil
2013: enrollment: 73,602 revenue: PHP 1,670 mil EBITDA: PHP 550 mil assets: PHP 5,142 mil
2012: enrollment: 72,191 revenue: PHP 1,577 mil EBITDA: PHP 523 mil assets: PHP 2,772 mil
2011: enrollment: 66,081 revenue: PHP 1,481 mil EBITDA: PHP 276 mil assets: PHP 3,009 mil
Comparables (ticker): market cap; enrollment; price/book; price/ebitda
STI Hldgs (STI): PHP 6.7bil; 81,726; 0.97x; 9.8x
Far Eastern Uni. (FEU): PHP 17.3bil; 27,884; 3.42x; 17.7x
iPeople (IPO): PHP 9.0bil; Unknown; 2.73x; 10.7x
Centro Escolar Uni. (CEU): PHP 3.9 bil; 22,438; 1.60x; 9.2x
* STI or System Technology Institute was founded by ex-IBM executives in 1983 as a single IT school. STI was subsequently sold to a local investor-entrepreneur (more on him below) and has now become the largest chain of degree-granting vocational colleges in the Philippines with ~82,000 students across ~85 campus locations primarily under the “STI” brand focused on delivering practical job-specific training to students from lower and middle income families.
**The majority of STI Holdings’ book value represents owned real estate in the form of land/buildings (often in prime locations) purchased for college campuses. After engaging Colliers to perform a rough desktop valuation of STI’s real estate we are comfortable that these assets represent significant underlying value to the company’s shareholders.
*** total enrollment figures includes students enrolled at STI brand campuses (both owned/franchised), De Los Santos STI colleges, iAcademy, West Negros University (newly acquired), and Philippine Women’s University (newly acquired). The average annual enrollment for only the 100% STI-branded campuses (both owned and franchised) increased from 60,832 in 2011 to 66,259 in 2014.
STI Holdings 2012 public offering prospectus: https://www.dropbox.com/s/mzj9hujhsal35nt/IPO.pdf?dl=0
STI Holdings 2012 public offering presentation by Religare: https://www.dropbox.com/s/bo18k9shetbztse/Religare%20STI%20Final.pdf?dl=0
STI Holdings FY3/2014 annual report: http://www.stiholdings.com/beta/wp-content/uploads/2014/07/STI-Holdings-SEC-Form-17-A-as-of-31-March-2014_Final-SEC.pdf
STI Holdings FY3/2014 annual report w/color photos and extra (not available online or on Bloomberg): https://www.dropbox.com/s/d5etydjd5ogplpm/2014ar%20color.pdf?dl=0
STI Holdings FY3/2014 annual shareholder meeting presentation (not available online or on Bloomberg): https://www.dropbox.com/s/fvayw1u4lvsjbf1/STI%20ESH%202014%20Mgmt%20Report.pdf?dl=0
STI Holdings FY3/2014 Chairman’s letter to shareholders present at the annual shareholder meeting (not available online or on Bloomberg): https://www.dropbox.com/s/0cgtlns9bprf7qs/20140926%20annual%20meeting%20comments.pdf?dl=0
STI Holdings FY3/2014 minutes of the annual stockholders’ meeting: http://www.stiholdings.com/beta/wp-content/uploads/2014/10/STI-Holdings-ASM-Sep-26-2014-1.pdf
STI Holdings FY3/2015 2nd quarter report: http://www.stiholdings.com/beta/wp-content/uploads/2014/11/STI-Holdings-17Q-Sep-30-2014-SEC-ack-receipt.pdf
PhilPlans 2013 audit filed with the SEC (not available online or on Bloomberg): https://www.dropbox.com/s/w3mq0x4mr5y7clu/2013%20audit.pdf?dl=0
2013 magazine profile of Eusebio Tanco, majority shareholder and Chairman of STI Holdings: https://www.dropbox.com/s/ng7nvemwfuw21ur/201309%20asian%20dragon%20profile.pdf?dl=0
WHY INVEST IN STI HOLDINGS?
STI exists to help solve a serious social problem:
Unemployment is a big problem in the Philippines, the twelfth most populous country in the world (97 million and counting). Half of all Filipinos are under 30 years old, so youth unemployment is an even bigger problem; according to the International Labour Organization, the youth unemployment rate in the Philippines was over twice the national average.1 According to the World Bank, there are at least 10 million unemployed/underemployed Filipinos, with 1.15 million Filipinos entering the workforce in each of the next four years. Of these 1.15 million new workers, only 500,000 will have college degrees, and of these only 240,000 will be absorbed in “good” formal industries like manufacturing, business process outsourcing, real estate, and finance.2 This suggests less than a quarter of all jobseekers in the Philippines actually find a “good” job. Not surprisingly, over 10% of Filipinos work overseas today.
STI Education has turned this social problem into a business opportunity over the last thirty years by offering a curriculum focused on IT, hospitality, accounting/business, etc. that potentially leads to higher quality jobs in the formal economy. STI’s colleges are not finishing schools for rich kids or ivory towers for ambitious academics – the only reason they exist is to teach students what their potential employers need them to know. Though we understand only half of all STI students eventually graduate, the payoffs for those that do are big. The total cost of STI’s 2-year certificate programs (19% of enrollment) and 4-year degree programs (81% of enrollment) are roughly PHP 40,000-60,000 (USD 917-1,375) and PHP 120,000-180,000 (USD 2,751-4,127), respectively. These tuition rates are cheaper than the most elite Filipino universities and compare extremely favorably versus the typical post-graduation annual starting salaries of PHP 144,000-180,000 (USD 3,301-4,127) offered by respectable, publicly listed STI recruiters like Starbucks, Playtech, Sykes, Denso, and Infosys.3
STI colleges are not ranked among the top 10 in the country, but its value proposition to new students – competitively-priced practical education at a ranked institution that prestigious companies recruit from – seems compelling.4 As a result, the STI brand is well known: basically every Filipino we asked in Manila generally recognized the brand and/or knew relatives who attended. Although just half of all STI graduates land a job immediately after graduation, the fact that campuses teach standardized curriculum in 85 locations nationwide means students should not only save money on transportation and boarding, but they can also continue to work informally for their families during the school year.
That’s possibly why high school graduates continue to apply to STI: according to a July 10, 2014 filing to the Philippine Stock Exchange, freshman enrollment at STI for the 2014-2015 academic year increased 21.5% to 35,167. This increase occurred despite the fact that STI hiked tuition rates by 5% across the board last year.
Enrollment growth and occasional tuition hikes have been the secret to STI’s profit growth from 2010 to 2014: EBITDA increased from PHP 276 million to PHP 690 million while revenue and EBITDA per average enrolled student increased 27% and 142%, respectively. These achievements are especially impressive considering that there are virtually no student loan programs in the Philippines and that STI has been shifting away from franchised schools where operating expenses are borne by the franchisee to self-operated schools where expenses are borne by STI.
As long as A) there are millions of unemployed young Filipinos, and B) STI graduates can continue to land good jobs, enrollment growth and occasional tuition hikes could continue for several more years.
STI’s owner is an accomplished investor-entrepreneur:
Since it was founded in 1983 STI Education has had two sets of owners. The first owners who founded STI were ex-IBM executives who had the enlightened idea that a chain of franchised, standardized colleges could flourish in the Philippines. When these founders came into dispute in 2002, Eusebio “Yosi” Tanco, a shrewd Filipino investor-entrepreneur, stepped in to buy them out. Since then, Tanco and STI’s CEO Monico Jacob implemented a very different vision for STI: less franchising and more self-operated universities where the underlying real estate is owned outright.5 This long magazine interview https://www.dropbox.com/s/ng7nvemwfuw21ur/201309%20asian%20dragon%20profile.pdf?dl=0 Tanco gave in September 2013 neatly summarizes his background and ultimate vision for STI.
Eliminating franchisees should ensure STI’s education standard is consistently good enough to help graduates find jobs, attract new students, and justify occasional price increases. Owning the land/buildings in prime locations near students and potential employers means STI can freely renovate its classrooms to spec depending on what the market demands. Most importantly, owning real-estate hasn’t prevented STI from earning attractive returns on investment: according to management, STI’s single largest campus at Bonifacio City originally cost PHP 300 million to build but now generates over PHP 60 million of profit after tax. Another way to eyeball the organic return on assets of the STI campuses is to look at the geographic segment breakdown on page 37 of the 2014 annual report. There it shows that in Northern Luzon, Southern Luzon, Visayas, and Mindanao – the ex-Metro Manila regions where STI has been less active with new construction/acquisition – the after tax return on segment equity has been consistently high.
Tanco and Jacob’s long-term vision for STI is ambitious, but shareholders should sleep better knowing that they are experienced businessmen with a track record of value creation, especially at their other publicly listed company Asian Terminals Incorporated (ATI), the number two port operator in the Philippines. Since 1994, shortly after Tanco took a major stake in ATI and became Chairman, annual EBITDA increased from PHP 0.2 billion to PHP 3.3 billion. According to Bloomberg, from November 2004 to November 2014 ATI’s USD total return to shareholders was 1,754% versus 581% for the Philippine Composite Index. Coincidentally, we witnessed part of this incredible run because our previous employer was a shareholder in ATI in the mid-late 2000’s and we were directly involved in monitoring the company’s progress.
From what we can tell, Tanco and Jacob are focused on running STI Holdings for the benefit of shareholders, too: according to the 2014 annual report (p. 61) the total compensation for the entire board of directors amounted to less than USD 40,000 with zero salary/bonus.6 We have had limited interactions with Tanco, but we have communicated frequently with Jacob by phone, email, and in person. Jacob, who is 69 years old, is a high profile executive in the Philippines: he was the CEO of the national oil company (Petron) and has served for many years on the board of domestic fast food giant Jollibee. Yet despite his stature and busy schedule, he has been one of the most generous and investor-friendly CEOs we have ever met. In addition to some long phone calls, Jacob spent over six hours of his time personally touring us around STI’s campuses in Manila this year (according to him, we were the only foreign investor to request a campus tour in person to that point). Since then Jacob also arranged for us to separately speak with other senior executives within STI on the phone and in person. As if that wasn’t enough, Jacob has personally responded to the dozens of emails we have sent him, frequently within the same day!
Through a friend we were also able to cross-check STI’s reputation with a senior executive at another successful Southeast Asian for-profit education company that was until recently publicly listed. The feedback was positive and confirmed that STI has established a legitimate brand in vocational training.
If peers are any guide, STI’s business could have pricing power over the long-term:
High investment returns have been made in Philippine tertiary education – just ask the shareholders of the prestigious Far Eastern University (FEU), who enjoyed a USD total return of 1,439% from November 2004 to November 2014 despite recording very modest growth in student enrollment. Nevertheless, profits tripled over this period thanks to a consistent program of tuition price hikes, which ranged from +1-20% every single year going back to at least 2003.
Shareholders of Centro Escolar University (CEU), who enjoyed a USD total return of 290% from November 2004 to November 2014, also benefited from a steady diet of price increases in both tuition and laboratory fees. These ranged from 3% to 15% per year almost every year since 2003.
Versus the above two colleges, STI has positioned itself more as a vocational school for the mass market focused on growth through enrollment increases. As a result, STI hasn’t followed in FEU’s footsteps in terms of raising prices every single year. Still, STI did hike tuition by 5% in each of 2011 and 2014 without seeing a dip in enrollment, so we would assume there’s scope to raise prices again in the future.
STI’s core business is selling for free net of its non-core assets:
STI’s market value today still represents a discount to the value of its non-core assets: these include the underlying real estate in its education business, a 20% stake in PhilPlans (a large pre-need insurance company purchased from AIG in 2009 with other Tanco-controlled entities), and very large off balance sheet deferred tax assets owned by PhilPlans.
Underlying campus real estate: as mentioned earlier, STI prefers to own the underlying land and buildings of its colleges. Currently, STI owns the land and buildings for at least 16 of its 32 self-operated campuses in addition to several other properties. We were able to hire the valuation department of Colliers Philippines to perform a rough desktop valuation of STI’s owned properties based as much as possible on comparable transactions and/or replacement cost. Colliers confirmed that STI’s properties were worth at least PHP 4.6 billion as of mid-2014, a sum that could be conservative since the original cost of these land and buildings – some of which were acquired many years ago in prime locations – totaled PHP 5.2 billion according to the balance sheet as of 30 September 2014.
Loan-to-own receivable convertible into equity of Philippine Women’s University: A core strategy of STI management has been to opportunistically acquire control of other tertiary educational institutions, especially those with a good reputation but temporarily bad financial standing. Such an opportunity arose in 2011 when STI was able to acquire from creditors the outstanding debt (and valuable rights to campus real estate collateral) of Philippine Women’s University (http://www.pwu.edu.ph/), a 95-year old premier institution with over 4,000 students, for an initial outlay of just PHP 224 million. STI’s plan was to convert this debt into a 40% equity stake plus operational control of PWU. Since then, STI assumed de facto operational control of PWU while taking steps to convert their debt into equity. Unfortunately, the founding family behind PWU has recently been trying to renege on the original equity conversion agreement with STI. As a result, STI presented PWU with a notice of default on December 9, 2014 (see https://www.dropbox.com/s/4gkztexa1ek7zky/201412%20Notice%20of%20default.pdf?dl=0) demanding repayment of PHP 926 million and is beginning the process to foreclose on the collateral properties. Based on our discussions with Colliers, the underlying collateral properties – PWU campuses in prime locations – are really valuable, but to be conservative we’ve valued this asset at PHP 463 million or a 50% discount to the face value of the PHP 926m receivable in our sum-of-the-parts estimates. PWU’s financials were never consolidated into STI’s, but if STI was ultimately able to obtain equity control the consolidation impact would be meaningful because PWU’s audits indicate it’s been achieving annual education revenue of at least PHP 300m (while charging tuition per student of up to PHP 90,000 or double STI’s average).
20% stake in PhilPlans: the audited book value of STI’s 20% stake in PhilPlans was PHP 1.4 billion as of 30 September 2014. This stake in PhilPlans, a large pre-need insurance business acquired from AIG in 2009, is probably the most confusing aspect of STI, especially since Philplans’ PHP 40 billion of insurance float – invested entirely in marketable securities – creates significant mark-to-market earnings volatility that obscures the progress at STI’s core education business. According to Jacob, Tanco sought a win-win alliance between STI’s education business and PhilPlans, which sells pre-paid education plans.
The typical PhilPlans product essentially sells tuition forward, whereby a policyholder (a mother or father) pays cash to upfront or by installments over 10-12 years to fund the future college tuition of a beneficiary (a son or daughter). When the policy matures 10-12 years later, PhilPlans owes the policyholder a lump sum representing their original cash payments plus a promised rate of return (according to the CEO of PhilPlans that rate is about 3% now). Like any insurance company, PhilPlans profits if the investments made with the policyholder’s cash over 10-12 years can deliver a higher rate of return than what was originally promised to the policyholder. In that respect, PhilPlans has been consistently profitable since it was acquired by STI.
By using STI Education to acquire 20% of Philplans, however, Tanco was really attempting to create an insurance vehicle to pre-sell tuition exclusively to STI colleges. Rather than guarantee a fixed rate of return to policyholders, the insurance product envisioned by Tanco would guarantee future admission to an STI college campus instead – a win-win scenario for the policyholder and PhilPlans. Policyholders would be free of inflation risk (i.e. their child’s future college education could be adequately funded no matter what), and PhilPlans would be free of insurance risk (i.e. earning less on the policyholders funds than what was promised upfront) because the marginal cost of guaranteeing a seat in the back of an STI classroom – especially a classroom in a campus already owned by STI – is negligible. This sounds like a good concept on paper, but it’s still too early to know if it will work because most of PhilPlans’ policies today are still the plain vanilla pre-need products where policyholders are promised an explicit rate of return.
We’re not insurance experts, let alone Philippine pre-need insurance experts, so it’s difficult for us to judge the long-term value of Philplans even though it has a profitable track record. As of PhilPlans’ latest annual audit, its PHP 40 billion of investment float was invested mostly fixed income securities and is 100% externally managed, so we don’t see anything unique happening on that front. But we have met with Annette Tirol https://ph.linkedin.com/pub/annette-tirol/5b/712/630, President of PhilPlans, and came away with the strong impression that she was A) very experienced in sales as her Citi/HSBC retail banking CV suggests, and B) that she plans to increase the insurance sales force productivity in the next few years, even after growing it by 50% in 2013 (see https://www.dropbox.com/s/lu3hpf3u08hq66z/2013%20outlook.pdf?dl=0). From our perspective, it would be a pleasant surprise if insurance premiums grow and consistent underwriting profits materialize – but STI Holdings has managed to grow the education business this far without ever receiving a cash dividend from PhilPlans, so we don’t believe that the insurance assets are critical to the success of the education business.
Off balance sheet deferred tax assets: initially, there was frustratingly little financial information regarding STI’s 20% stake in PhilPlans, which is currently accounted for as an associate investment. Fortunately, we discovered that the annual audited financial statements of all privately held companies in the Philippines are available to the public on a pay-per-view basis at the Securities and Exchange Commission. The process of getting those documents was not straightforward, but after getting help navigating the SEC (online and in person) we were able to get copies of Philplans’ audits (see download link above).
One of the most eye-catching aspects of PhilPlans’ audits was the consistently low effective tax rate, which declined to 14% in 2014 (the statutory tax rate in the Philippines is 30%). The reason for this is that investments in long-term government securities are taxed at way below-average rates, and PhilPlans has benefited from realized gains in those securities. Buried in the footnotes about taxes, however, was the fact that PhilPlans actually has very large off balance sheet deferred tax assets – PHP 8 billion worth, 20% of which or PHP 1.6 billion is attributable to STI Holdings – in the form of net operating loss carryovers, or NOLCOs.
After Jacob graciously made the CFO of PhilPlans available to us by phone we learned that these NOLCOs were generated from realized capital gains in long-term government securities. According to the CFO of PhilPlans, the Philippines not only offers low tax rates on income and capital gains from government securities, but it also offers NOLCO deferred tax asset incentives to investors that earn capital gains from long-term government securities. NOLCO deferred tax assets can only be used within a specific time frame (3-5 years) to offset any future income from “ordinary” business activities such as rental income from investment property or underwriting profit from insurance. Since PhilPlans has not yet generated any “ordinary” business income (it doesn’t own investment property and it has been reporting underwriting losses) Ernst & Young decided to leave the NOLCO deferred tax assets off balance sheet.
If PhilPlans does eventually generate ordinary business income, however, then these NOLCOs would definitely be valuable in offsetting the tax liabilities from that income. According to the CFO of PhilPlans, if the volume of new insurance policy underwriting picks up – especially since they’ve been ramping up their sales force recently – then there is a real possibility that the underwriting losses could become underwriting profits at some point.
We are willing to take the leap of faith that STI Holdings’ non-core assets have value, and by some estimates this exceeds its current market cap of PHP 6.7 billion. Granted, we don’t know if or when the value of these non-core assets will be realized. Still, Jacob told us on multiple occasions he is aware of STI’s low stock market valuation and that an insurance spin-off might be in the best long-term interests of shareholders, while Tanco said point-blank to everyone at the September 2014 annual shareholders meeting that management was “exploring options for the insurance business” (see the official meeting minutes here where he said this http://www.stiholdings.com/beta/wp-content/uploads/2014/10/STI-Holdings-ASM-Sep-26-2014-1.pdf). We take some comfort knowing that even if we were to severely haircut the book values of the insurance assets, NOLCOs, PWU receivables, and underlying property, that would still mean buyers of STI Holdings shares today would be getting the core education business – a business that management intends to aggressively ramp up – at a very low single digit multiple of historical earnings.
UPCOMING K+12 LAW: STI’s BIGGEST RISK AND OPPORTUNITY
Everything we’ve learned indicates that STI’s core education business has done well and has a bright future, yet the company’s PHP 6.7 billion market value today assigns zero value to it. One reason for this is the a lack of easily accessible details about its non-core assets like Philplans, but the biggest reason STI shares appear undervalued probably has to do with a recent change in tertiary education laws.
The Basic Education Act of 2013, known by industry insiders as the “K+12” law, effectively adds two more years to compulsory education (taking it from 10 years to 12 years) starting 2016-2017. This means there will be almost zero college freshman enrollment at colleges across the country for that school year, something that will temporarily challenge most tertiary education providers, including STI.
What exactly will happen to colleges across the Philippines when K+12 is implemented in academic year 2016-2017? The simplest way to visualize the impact of K+12 is to imagine a college with only one student per grade. As you can see from the below, thanks to K+12, there won’t be any incoming freshman in 2016-2017 and 2017-2018. The gap in total enrollment this causes should take five years to work through before things go back to normal.
Academic year 2016-2017: 0 freshman, 1 sophomore, 1 junior, 1 senior
Academic year 2017-2018: 0 freshman, 0 sophomore, 1 junior, 1 senior
Academic year 2018-2019: 1 freshman, 0 sophomore, 0 junior, 1 senior
Academic year 2019-2020: 1 freshman, 1 sophomore, 0 junior, 0 senior
Academic year 2020-2021: 1 freshman, 1 sophomore, 1 junior, 0 senior
Academic year 2021-2022: 1 freshman, 1 sophomore, 1 junior, 1 senior
STI plans to overcome the leanest years of K+12 (i.e. 2017-2018, 2018-2019, and 2019-2020) by aggressively expanding total student enrollment to over 90,000 by the start of K+12 in 2016.7 This means adding capacity to existing campuses, building new campuses, and acquiring colleges outright from financially weak owners who aren’t ready for K+12.
Besides expansion and acquisition, STI has committed to implementing organic growth measures that should also mitigate the impact of K+12, such as reducing mid-year dropout rates, raising revenue per student (either explicitly by raising tuition rates or implicitly by shifting students towards higher priced 4-year programs), accepting more transfer students, and accepting pre-college high school students.
These pre-college high school students are very important to how STI plans to survive and thrive beyond the leanest years of K+12. In fact, STI was the first in the Philippines to start a “senior high school” program for high school students entering the newly created grades 11 and 12. Today that program already had over 1,500 students enrolled, and STI intends to ramp that number up aggressively.8 Since the facilities of most public high schools in the Philippines today are unable to cope with the looming additions of grade 11 and 12, the Philippine government will provide incoming grade 11 students with vouchers to attend a senior high school program of their choice, such as STI’s. Based on our recent discussions with STI management, the face value of these vouchers could be worth well over PHP 20,000 per student. Since STI’s senior high school program will A) have much better facilities/instructors than a typical public high school, and B) be positioned as a way for high school students to gain early acceptance and credits to STI colleges, management believes that they will be able to charge an additional fee on top of the free government voucher to the students that can afford it. STI’s goal is to make sure the senior high school program is “revenue neutral” on a per student basis, meaning the voucher plus additional STI fee are as close as possible to the existing average tuition rates charged to freshman at STI campuses.
Since STI was the first-mover in achieving senior high school accreditation and approaching high schools to partner with them on K+12 adjustments, management told us they are confident they will be able to replace many if not most of the +30,000 annual freshman lost to K+12 with incoming senior high school students by 2016. P&L wise, management has guided to us that while they expect a decline in the leanest K+12 years, their projections show that they should remain profitable throughout the K+12 years assuming they can execute on the senior high school program and various cost cutting initiatives.
In the last year we also met with the management of Far Eastern University (FEU) and iPeople (IPO), two of the three other publicly listed tertiary education providers in the Philippines. Versus those two peers, STI seems to have the most ambitious expansion plans and appears the most prepared for K+12 with respect to replacing lost freshman with senior high school students. Curiously, STI shares trade at meaningful discounts to FEU and IPO.
Owning STI shares comes with unique risks aside from K+12. For example, STI only has a two year history as a publicly listed education company (it was merged into a listed shell that was formerly owned by Jardine Matheson), and the quality of free online education might improve so much in the near future that it takes market share from campus-centric educators like STI.
We also have the sense that STI is a company owned by an extremely shrewd control shareholder. That A) STI has structured itself as an educational institution (taxed at just 10% or less) that owns an insurance company sitting on piles of deferred tax assets and B) is using that as a platform to acquire additional schools from sometimes distressed sellers (i.e. Philippine Women’s University) definitely says STI management is fluent in financial engineering, a dangerous skill if used against minority shareholders.
3STI maintains an impressive corporate recruitment website for its students/graduates: http://www.i-cares.com/. Note the recruitment ads posted by prominent listed companies like US-listed Starbucks http://www.i-cares.com/Job_DetailsOnly.aspx?jobcode=JP01205, UK-listed Playtech http://www.i-cares.com/Job_DetailsOnly.aspx?JobCode=JP01564, US-listed Sykes http://www.i-cares.com/Job_DetailsOnly.aspx?jobcode=JP01285, Japan-listed Denso http://www.i-cares.com/Job_DetailsOnly.aspx?JobCode=JP01373, and India-listed Infosys http://www.i-cares.com/Job_DetailsOnly.aspx?jobcode=JP01308.
4STI was ranked 41 of the top 100 universities in the Philippines http://www.localpulse.net/education/2014-top-100-colleges-universities-philippines-967/
5 32 of STI’s 85 campus locations are self-operated, and more than half of the company’s system-wide revenues come from self-operated campuses.
6 We don’t believe the board is working for free, but several of them are Tanco family members that own/control STI (and many other businesses), and the non-family members like Jacob are trusted advisors in multiple Tanco entities that are probably being compensated out of other pockets.
7 See STI’s K+12 plans here https://www.dropbox.com/s/fvayw1u4lvsjbf1/STI%20ESH%202014%20Mgmt%20Report.pdf?dl=0.
8 Of the 92 schools licensed by the department of education to offer senior high school, 70 of them are STI campuses http://www.interaksyon.com/business/98125/sti-begins-adjustment-to-k-12-program.
Enrollment growth, tuition hikes, potential spin-off of non-core assets, continued dividend increases
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