Wednesday, Credit Suisse downgraded New Oriental Education & Technology Group (EDU) shares to Neutral from Outperform and lowered its price target to US$76.80 from US$79.30.
The brokerage attributed the downgrade based on valuation and its near-term margin hiatus. Second quarter of 2010 was soft and management revised down full-year margin guidance citing the accelerated roll-out of U-Can 'elite'. However, recent enrolments have shown a strong pick-up and ASP trends remain positive. EDU's share price reacted by rising 10% on heavy volume, ignoring the near-term negative earnings message.
The brokerage now projects 28% second half constant currency revenue growth and 26% NP growth. The brokerage needs to wait for summer to prove if EDU's current investments bring a strong, above-40% earnings catch-up in fiscal 2011. Based on a 31x P/E (1x PEG), the brokerage introduced his calendar 2010 price target of US$76.8 from US$79.3, reflecting its estimate reduction of 12% for fiscal 2010 and 5%-6% for fiscal 2011 and fiscal 2012.
On FY5/11 valuation, the brokerage thinks EDU warrants a US$90 fair value, 10%-15% above the current share price. But for now, the brokerage feels EDU's share price deserves to range-trade at US$75-US$80, currently at 39x FY5/10 P/E already.
Currently, EDU is down US$4.34 or 5.47% and trading at US$75.01.
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