RLS recorded a 48% yoy decline in net profit to $51.1m that was below our expectations. Stripping out exceptional items, FY09 core earnings (-4.5% yoy) disappointed mainly due to weaker-than-expected student enrolment and higher taxes. Higher taxes were incurred due to the disposal of land within OUC and higher withholding taxes overseas.

Student enrolment stood largely flat at 32,828. Higher student enrolment from PES in Asia Pacific was offset by declining PES enrolment in China. The student enrolment in China was affected by the economic slowdown and the change of name of the PES schools as required by the new regulations in PRC. However, the group believes that the worst is over and is targeting an organic student enrolment growth of 10-15% in FY10.

To capture rising demand for Vocational & Technical education, RLS intends to set up 8 new colleges in FY10 in fast-growing countries like India and Vietnam. Positive catalysts could come from OUC, through M&A and JV opportunities with the existing colleges on campus that currently contains a sizable student population of 35,000 students.

Net gearing was effectively halved to 68%, thanks to the on-going efforts in debt repayment and positive operating cashflows. With a cash-generative business and the payment of OUC deferred, the group aims to pare down its gearing by FY10. If executed well, besides having the largest education network in Asia Pacific, RLS will be financially sound to ride the next wave of growth and to resume dividends.

While we have reduced our FY10 earnings estimates by 15% to take into account higher tax rates and higher personnel expenses, we remain positive on RLS long-term growth prospects. Its extensive and growing education network presents great value as it matures beyond a critical mass. Maintain BUY with a revised target price of 69 cents pegged to 18.5x FY10 PER, in line with global peers.