Intrinsic value of RISE Education Cayman ADR - REDU

Previous Close

$10.20

  Intrinsic Value

$132.82

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  Rating & Target

str. buy

+999%

Previous close

$10.20

 
Intrinsic value

$132.82

 
Up/down potential

+999%

 
Rating

str. buy

We calculate the intrinsic value of REDU stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.6

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  43.10
  39.29
  35.86
  32.77
  30.00
  27.50
  25.25
  23.22
  21.40
  19.76
  18.28
  16.96
  15.76
  14.68
  13.72
  12.84
  12.06
  11.35
  10.72
  10.15
  9.63
  9.17
  8.75
  8.38
  8.04
  7.74
  7.46
  7.22
  6.99
  6.79
Revenue, $m
  210
  292
  397
  527
  685
  873
  1,094
  1,347
  1,636
  1,959
  2,317
  2,710
  3,137
  3,598
  4,092
  4,617
  5,174
  5,761
  6,379
  7,026
  7,703
  8,409
  9,145
  9,911
  10,708
  11,536
  12,397
  13,292
  14,221
  15,188
Variable operating expenses, $m
  184
  252
  339
  447
  577
  733
  916
  1,126
  1,365
  1,633
  1,919
  2,245
  2,598
  2,980
  3,389
  3,824
  4,285
  4,772
  5,283
  5,819
  6,380
  6,965
  7,574
  8,209
  8,869
  9,555
  10,268
  11,009
  11,779
  12,579
Fixed operating expenses, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  184
  252
  339
  447
  577
  733
  916
  1,126
  1,365
  1,633
  1,919
  2,245
  2,598
  2,980
  3,389
  3,824
  4,285
  4,772
  5,283
  5,819
  6,380
  6,965
  7,574
  8,209
  8,869
  9,555
  10,268
  11,009
  11,779
  12,579
Operating income, $m
  26
  40
  58
  80
  107
  140
  178
  221
  271
  326
  398
  466
  539
  618
  703
  793
  889
  990
  1,096
  1,207
  1,323
  1,445
  1,571
  1,703
  1,839
  1,982
  2,130
  2,283
  2,443
  2,609
EBITDA, $m
  42
  58
  79
  106
  137
  175
  219
  270
  328
  392
  464
  543
  628
  721
  820
  925
  1,036
  1,154
  1,278
  1,408
  1,543
  1,685
  1,832
  1,985
  2,145
  2,311
  2,483
  2,663
  2,849
  3,042
Interest expense (income), $m
  1
  5
  11
  18
  28
  40
  54
  71
  91
  114
  140
  169
  201
  237
  275
  317
  361
  409
  459
  512
  568
  626
  687
  751
  817
  886
  958
  1,033
  1,111
  1,191
  1,275
Earnings before tax, $m
  21
  29
  40
  52
  68
  86
  107
  131
  157
  187
  229
  264
  302
  343
  386
  432
  480
  531
  584
  639
  697
  757
  820
  885
  953
  1,023
  1,097
  1,172
  1,251
  1,334
Tax expense, $m
  6
  8
  11
  14
  18
  23
  29
  35
  42
  50
  62
  71
  82
  93
  104
  117
  130
  143
  158
  173
  188
  205
  221
  239
  257
  276
  296
  317
  338
  360
Net income, $m
  15
  21
  29
  38
  50
  63
  78
  95
  115
  136
  167
  193
  221
  250
  282
  315
  350
  387
  426
  467
  509
  553
  599
  646
  696
  747
  800
  856
  914
  973

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  406
  565
  767
  1,019
  1,325
  1,689
  2,115
  2,606
  3,164
  3,789
  4,482
  5,242
  6,068
  6,960
  7,914
  8,931
  10,008
  11,144
  12,339
  13,590
  14,900
  16,266
  17,689
  19,171
  20,712
  22,314
  23,979
  25,710
  27,508
  29,377
Adjusted assets (=assets-cash), $m
  406
  565
  767
  1,019
  1,325
  1,689
  2,115
  2,606
  3,164
  3,789
  4,482
  5,242
  6,068
  6,960
  7,914
  8,931
  10,008
  11,144
  12,339
  13,590
  14,900
  16,266
  17,689
  19,171
  20,712
  22,314
  23,979
  25,710
  27,508
  29,377
Revenue / Adjusted assets
  0.517
  0.517
  0.518
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
  0.517
Average production assets, $m
  90
  126
  171
  227
  295
  376
  471
  581
  705
  844
  999
  1,168
  1,352
  1,551
  1,763
  1,990
  2,230
  2,483
  2,749
  3,028
  3,320
  3,624
  3,942
  4,272
  4,615
  4,972
  5,343
  5,729
  6,129
  6,546
Working capital, $m
  -205
  -286
  -389
  -516
  -671
  -856
  -1,072
  -1,321
  -1,603
  -1,920
  -2,271
  -2,656
  -3,075
  -3,526
  -4,010
  -4,525
  -5,071
  -5,646
  -6,251
  -6,886
  -7,549
  -8,241
  -8,962
  -9,713
  -10,494
  -11,306
  -12,149
  -13,026
  -13,937
  -14,884
Total debt, $m
  202
  339
  514
  732
  996
  1,311
  1,679
  2,103
  2,585
  3,125
  3,724
  4,381
  5,095
  5,865
  6,689
  7,568
  8,498
  9,480
  10,512
  11,594
  12,725
  13,905
  15,135
  16,415
  17,747
  19,131
  20,570
  22,064
  23,618
  25,233
Total liabilities, $m
  350
  488
  663
  880
  1,144
  1,459
  1,827
  2,252
  2,734
  3,274
  3,873
  4,529
  5,243
  6,013
  6,838
  7,716
  8,647
  9,628
  10,660
  11,742
  12,873
  14,054
  15,283
  16,564
  17,895
  19,280
  20,718
  22,213
  23,767
  25,381
Total equity, $m
  55
  77
  104
  139
  180
  230
  288
  354
  430
  515
  610
  713
  825
  947
  1,076
  1,215
  1,361
  1,516
  1,678
  1,848
  2,026
  2,212
  2,406
  2,607
  2,817
  3,035
  3,261
  3,496
  3,741
  3,995
Total liabilities and equity, $m
  405
  565
  767
  1,019
  1,324
  1,689
  2,115
  2,606
  3,164
  3,789
  4,483
  5,242
  6,068
  6,960
  7,914
  8,931
  10,008
  11,144
  12,338
  13,590
  14,899
  16,266
  17,689
  19,171
  20,712
  22,315
  23,979
  25,709
  27,508
  29,376
Debt-to-equity ratio
  3.660
  4.420
  4.930
  5.280
  5.530
  5.710
  5.840
  5.930
  6.010
  6.060
  6.110
  6.140
  6.170
  6.200
  6.210
  6.230
  6.240
  6.250
  6.260
  6.270
  6.280
  6.290
  6.290
  6.300
  6.300
  6.300
  6.310
  6.310
  6.310
  6.320
Adjusted equity ratio
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136
  0.136

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  15
  21
  29
  38
  50
  63
  78
  95
  115
  136
  167
  193
  221
  250
  282
  315
  350
  387
  426
  467
  509
  553
  599
  646
  696
  747
  800
  856
  914
  973
Depreciation, amort., depletion, $m
  16
  19
  22
  25
  30
  35
  41
  49
  57
  66
  66
  77
  90
  103
  117
  132
  148
  164
  182
  201
  220
  240
  261
  283
  306
  329
  354
  379
  406
  434
Funds from operations, $m
  31
  40
  50
  64
  79
  98
  119
  144
  172
  202
  234
  270
  310
  353
  399
  447
  498
  552
  608
  667
  729
  793
  860
  929
  1,001
  1,076
  1,154
  1,235
  1,319
  1,407
Change in working capital, $m
  -62
  -81
  -103
  -127
  -155
  -185
  -216
  -249
  -283
  -317
  -351
  -385
  -419
  -451
  -484
  -515
  -546
  -576
  -605
  -634
  -663
  -692
  -721
  -751
  -781
  -812
  -844
  -877
  -911
  -947
Cash from operations, $m
  93
  120
  153
  191
  234
  282
  335
  393
  454
  519
  585
  655
  729
  805
  882
  962
  1,044
  1,128
  1,213
  1,302
  1,392
  1,485
  1,581
  1,680
  1,782
  1,888
  1,998
  2,112
  2,231
  2,354
Maintenance CAPEX, $m
  -4
  -6
  -8
  -11
  -15
  -20
  -25
  -31
  -38
  -47
  -56
  -66
  -77
  -90
  -103
  -117
  -132
  -148
  -164
  -182
  -201
  -220
  -240
  -261
  -283
  -306
  -329
  -354
  -379
  -406
New CAPEX, $m
  -27
  -36
  -45
  -56
  -68
  -81
  -95
  -109
  -124
  -139
  -154
  -169
  -184
  -199
  -213
  -227
  -240
  -253
  -266
  -279
  -292
  -304
  -317
  -330
  -343
  -357
  -371
  -386
  -401
  -416
Cash from investing activities, $m
  -31
  -42
  -53
  -67
  -83
  -101
  -120
  -140
  -162
  -186
  -210
  -235
  -261
  -289
  -316
  -344
  -372
  -401
  -430
  -461
  -493
  -524
  -557
  -591
  -626
  -663
  -700
  -740
  -780
  -822
Free cash flow, $m
  62
  79
  100
  124
  151
  182
  216
  252
  292
  333
  374
  420
  467
  516
  567
  619
  672
  727
  783
  841
  900
  961
  1,024
  1,089
  1,156
  1,225
  1,298
  1,373
  1,450
  1,532
Issuance/(repayment) of debt, $m
  105
  138
  175
  217
  264
  315
  368
  424
  482
  540
  599
  657
  714
  770
  825
  878
  931
  982
  1,032
  1,082
  1,131
  1,180
  1,230
  1,280
  1,332
  1,384
  1,439
  1,495
  1,554
  1,615
Issuance/(repurchase) of shares, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  106
  138
  175
  217
  264
  315
  368
  424
  482
  540
  599
  657
  714
  770
  825
  878
  931
  982
  1,032
  1,082
  1,131
  1,180
  1,230
  1,280
  1,332
  1,384
  1,439
  1,495
  1,554
  1,615
Total cash flow (excl. dividends), $m
  168
  217
  275
  341
  415
  496
  584
  677
  773
  873
  973
  1,077
  1,181
  1,286
  1,392
  1,497
  1,603
  1,709
  1,815
  1,922
  2,031
  2,141
  2,254
  2,369
  2,487
  2,610
  2,736
  2,867
  3,004
  3,146
Retained Cash Flow (-), $m
  -16
  -22
  -28
  -34
  -42
  -50
  -58
  -67
  -76
  -85
  -94
  -103
  -112
  -121
  -130
  -138
  -146
  -155
  -162
  -170
  -178
  -186
  -194
  -202
  -210
  -218
  -226
  -235
  -245
  -254
Prev. year cash balance distribution, $m
  8
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  160
  195
  247
  307
  374
  447
  526
  610
  698
  788
  879
  973
  1,069
  1,165
  1,262
  1,359
  1,456
  1,554
  1,652
  1,752
  1,853
  1,955
  2,060
  2,167
  2,278
  2,392
  2,510
  2,632
  2,759
  2,892
Discount rate, %
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
  153
  179
  215
  253
  290
  324
  355
  381
  401
  413
  417
  415
  406
  391
  370
  345
  317
  286
  254
  223
  192
  162
  135
  110
  89
  70
  54
  41
  30
  22
Current shareholders' claim on cash, %
  99.6
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5
  99.5

RISE Education Cayman Ltd is a holding company. The Company, through its subsidiaries, offers after-school English teaching and tutoring services to students aged three to 18. It operates in China’s junior English Language Training (ELT) market. Its offers three flagship courses, including Rise Start, Rise On and Rise Up, that are designed for students aged three to six, seven to twelve and 13 to 18, respectively. As of June 30, 2017, the Company had a network of 246 learning centers across 80 cities in China, among which 56 were self-owned centers and 190 centers were franchised learning centers. Its suite of products comprises both online and offline coursework. Its also offers a series of complementary products to students from both self-owned learning centers and franchised learning centers, including online products Can-Talk and Rise Library Online, and offline products Rise Camp, Rise Workshop and Rise Overseas Study Tour.

FINANCIAL RATIOS  of  RISE Education Cayman ADR (REDU)

Valuation Ratios
P/E Ratio 140.3
Price to Sales 10.9
Price to Book 19
Price to Tangible Book
Price to Cash Flow 32.1
Price to Free Cash Flow 38.7
Growth Rates
Sales Growth Rate 33.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 0%
Cap. Spend. - 3 Yr. Gr. Rate NaN%
Financial Strength
Quick Ratio 16
Current Ratio 0
LT Debt to Equity 81.4%
Total Debt to Equity 91.5%
Interest Coverage 13
Management Effectiveness
Return On Assets 4.2%
Ret/ On Assets - 3 Yr. Avg. 0%
Return On Total Capital 7.2%
Ret/ On T. Cap. - 3 Yr. Avg. -0%
Return On Equity 9.5%
Return On Equity - 3 Yr. Avg. 0.7%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 48.5%
Gross Margin - 3 Yr. Avg. 36.5%
EBITDA Margin 22.3%
EBITDA Margin - 3 Yr. Avg. 13.2%
Operating Margin 9.7%
Oper. Margin - 3 Yr. Avg. -6.6%
Pre-Tax Margin 11.7%
Pre-Tax Margin - 3 Yr. Avg. -4.5%
Net Profit Margin 7.8%
Net Profit Margin - 3 Yr. Avg. -4.2%
Effective Tax Rate 41.7%
Eff/ Tax Rate - 3 Yr. Avg. 13.9%
Payout Ratio 0%

REDU stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the REDU stock intrinsic value calculation we used $146.504685611 million for the last fiscal year's total revenue generated by RISE Education Cayman ADR. The default revenue input number comes from 0001 income statement of RISE Education Cayman ADR. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our REDU stock valuation model: a) initial revenue growth rate of 43.1% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for REDU is calculated based on our internal credit rating of RISE Education Cayman ADR, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of RISE Education Cayman ADR.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of REDU stock the variable cost ratio is equal to 89.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for REDU stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for RISE Education Cayman ADR.

Corporate tax rate of 27% is the nominal tax rate for RISE Education Cayman ADR. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the REDU stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for REDU are equal to 43.1%.

Life of production assets of 15.1 years is the average useful life of capital assets used in RISE Education Cayman ADR operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for REDU is equal to -98%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $46.8759068924 million for RISE Education Cayman ADR - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 55 million for RISE Education Cayman ADR is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of RISE Education Cayman ADR at the current share price and the inputted number of shares is $0.6 billion.

COMPANY NEWS

▶ RISE Education Announces Management Change   [Nov-09-18 07:00AM  GlobeNewswire]
▶ Who Really Owns RISE Education Cayman Ltd (NASDAQ:REDU)?   [Sep-24-18 02:53PM  Simply Wall St.]
▶ RISE Education Filed Its Annual Report on Form 20-F   [Apr-19-18 09:30PM  GlobeNewswire]
▶ Who Owns RISE Education Cayman Ltd (NASDAQ:REDU)?   [Jan-01-18 03:35PM  Simply Wall St.]
▶ IPO News This Week: BP Midstream Leads 8 Scheduled IPOs   [Oct-22-17 10:07AM  24/7 Wall St.]

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