Raffles Education: A Hidden Gem with ROCE Turnaround and Insider Confidence?

Raffles Education Limited (SGX:NR7), a Singapore-based education and property investment firm, has quietly seen its Return on Capital Employed (ROCE) improve dramatically over the past five years—a potential sign of operational efficiency gains. Meanwhile, insiders, including its CEO, have been aggressive buyers of shares, signaling confidence in the stock's undervalued status. For investors seeking catalyst-driven opportunities in undervalued compounding assets, Raffles presents an intriguing—if risky—case.

ROCE: A Fragile but Positive Trend

Raffles' ROCE has surged by 495% since 2020, rising from a negligible level to 1.7% in the trailing twelve months (TTM) through December 2024. While this marks significant progress, the metric remains far below the 9.8% industry average, underscoring the distance to full recovery. The improvement stems from better capital utilization, as EBIT rose despite flat capital employed (Total Assets minus Current Liabilities). However, earnings themselves have declined by 53.1% annually over five years, with a TTM net loss of S$13.65 million.

This divergence raises questions: Can Raffles sustain ROCE growth while reversing earnings declines? Its 3.45% annual revenue growth since 2020 suggests modest demand resilience, but operating margins remain deeply negative (-12.15%), hampering profitability. A key catalyst could be cost restructuring or asset sales (e.g., property holdings) to boost margins.

Insider Buying: A Vote of Confidence?

Insiders, including Chairman & CEO Hua Seng Chew, have been active buyers. In October 2024 alone, Chew purchased 7.7 million shares worth S$317,000—a clear signal of optimism. Other insiders added S$1.9 million to their holdings in 2024, bringing total insider ownership to 59% of the company. Such stakes align their interests with shareholders, though the timing of purchases (during a 65% five-year stock decline) may reflect desperation as much as confidence.

Valuation: Deeply Discounted, but Why?

Raffles' stock trades at a negative P/E ratio (-3.28) due to losses, while its EV/EBITDA of 10.16 is reasonable given its industry peers. However, negative free cash flow (-S$1.8 million TTM) and a net debt of S$188 million cloud its liquidity outlook. The market's skepticism is warranted: the firm's Altman Z-Score of 0.39 signals a 95%+ probability of bankruptcy under current conditions.

Catalysts and Risks

Positive Catalysts:
- ROCE improvement: If operational efficiencies lead to sustained EBIT growth, margins could stabilize.
- Property monetization: The company's S$1.1 billion asset base includes real estate that could be sold to reduce debt or fund growth.
- Insider support: Management's high ownership and recent purchases may signal a turnaround plan.

Risks:
- Debt burden: With debt/EBITDA of 6.6, any further earnings declines could trigger liquidity crises.
- Earnings volatility: Net losses have worsened yearly, and there's no clear path to profitability.
- Industry headwinds: Education sector challenges, including declining student numbers and competition, persist.

Investment Takeaway

Raffles Education is a high-risk, high-reward play. The ROCE improvement and insider buying hint at undervaluation, but the firm's negative earnings and precarious debt levels make this a speculative bet. Investors should consider:
- Allocating a small position if they believe management can turnaround operations or monetize assets.
- Avoiding the stock unless convinced of a credible path to profitably deploy capital.

In conclusion, Raffles Education's metrics suggest a “turnaround in progress”, but execution remains uncertain. For contrarian investors willing to bet on management's ability to capitalize on its ROCE gains and asset base, NR7 could offer asymmetric upside—if the company survives.