In Need of Confirmed Earnings Growth
The author is an analyst of NH Investment & Securities. She can be reached at jiyoony@nhqv.com. -- Ed.
IB Kimyoung is to book stable earnings at the college transfer division thanks to: 1) an increase in the number of transfer slots at the police college and pharmacy and medical colleges for the 2023 academic year; and 2) a rise in the number of colleges adopting ‘transfer’ English tests. That said, relative to other domestic education stocks, IB Kimyoung shares appear in need of confirmed earnings growth driven by recovering sales at the employment division and effective cost control to justify their lofty valuations.
Police college to recruit 50% of students through transfer admission
We forecast that the number of college transfer admissions will further expand going forward. From the 2023 academic year, the police college is to recruit 50% of incoming students through transfer admission, and the acceptance rate for next year’s transfer enrollment comes to 30.3:1 (vs 52:1 for general college applicants). Meanwhile, colleges of pharmacy have changed to an integrated six-year system on the abolition of the Pharmacy Education Eligibility Test (PEET) from the 2022 academic year, allowing for the transfer of third-year students through the general transfer test. In addition, as most medical and dental graduate schools that previously selected graduate students based on Medical Dental Education Eligibility Test (MDEET) scores are now being converted into medical or dental colleges, an uptick in transfers into medical fields is expected.
Moreover, we point out that many top-15 colleges and universities located in Seoul now require transfer admission applicants to take ‘transfer’ English exams (in-house-developed English tests focused on gauging applicants’ reading comprehension), instead of accepting the scores of standardized English Tests, and such trend should be beneficial for IB Kimyoung, a dominant player in the Korean college transfer exam education market (up to 80% market share).
2H22 outlook: Cost control at employment education division to be key to earnings
In 2Q22, y-y sales growth slowed to respective +8% and +2% at the college transfer and employment education divisions due to the spread of the Omicron variant. We forecast that these divisions will book mid-single-digit sales growth in 3Q22, as well.
Accordingly, we revise down our 2022E (consolidated) sales and OP forecasts to respective W85.4bn (+7% y-y) and W3.7bn (-53% y-y) to reflect: 1) slower-than-expected recovery at the employment education (computer, beauty) division; and 2) greater expense burden to fund recruitment and infrastructure investment for new businesses.
Trading at a 2022E and 2023F P/E of respective 28x and 25x (Sep 21, W2,160), IB Kimyoung shares look overvalued among domestic education stocks (avg 2022E P/E of 8x). Confirmation of earnings growth driven by recovering sales at the employment division and effective cost control should be necessary to justify such lofty valuations.