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HRFS

CEU & FEU


Final Paper
MBA 2009 Cohort 3

KT Tan*Amit Gupta*Sudeep Lodh*Aldi Pramadhana*Toda Meneses*Rahul Kumar


INDUSTRY ANALYSIS

General Introduction: There is a high reliance on the private institutes in the Philippines
Higher education sector. The Philippines government has allocated a large portion of the
budget (2.5%) to education. The analysis below pertains only to the higher education
institutes in the country

Industry: Higher Education which encompasses degree courses like Bachelor of Science,
Arts, Nursing, Optometry, Medical Technology, Law, etc. and Masters courses in Arts,
Business Administration, Science, etc.

The Philippines Higher Education Institutes are divided into broad categories:

1. Private Higher Education Institutes (PHEI): These constitute nearly 74% of the total
number of higher education institutes in the country (total of nearly 2000 institutes) 1.
They are established under the Corporation Code and are governed by the special laws
and general provisions of the code. The PHEI have been instrumental in providing higher
education in the country with a major focus on professional courses that generate
immediate employmeny.

They are further divided in to the following classes:

a) Sectarian Institutes: Sectarian institutes are usually non-stock, non profit, duly
incorporated, owned and operated by a religious organization.

b) Non-Sectarian Institutes: Non-Sectarian institutes are duly incorporated, owned and


operated by private entities that are not affiliated to any religious organization.2

2. Public Higher Education Institutes: These institutes constitute the remaining 25% of
the total high education institutes. They are further divided into The State Universities
and Colleges (SUCs), The Local Universities and Colleges (LUCs) and Supervised
Institution (CSI).

Porter’s Five forces Analysis

1. Threat of new entrants: The threat of new entrants in the Philippines Higher Education
industry is high since the government regulations for the private institutes has been
flexible and there is an increase in granting autonomy in the recent years by lifting the
moratorium on applications for new courses, new schools and conversions, by liberalizing
tuition fee policy for private schools.3 Thus the threat of new entrants is HIGH.

2. Threat of substitutes: The main substitutes would be the vocational or courses, the
distant learning programs and the courses offered in foreign universities. At present there
is not much threat from these substitutes since majority of the students are focussed
1
Source: CHED http://www.ched.gov.ph/hes/index.html

2
Source: CHED

3
Source: Wikipedia
mainly on professional or degree courses which generate immediate employment. Also,
the courses offered are not in direct competition since they cost relatively higher than a
similar course in the Philippines. Thus, the threat of the substitutes can be said to be
LOW.

3. Bargaining power of buyers: The buyers here represent the students that are enrolled in
these institutes. Even with various policies in place there is a clear disparity between the
fees in the private institutes and public institutes. Most of the students in private sectarian
institutes come from higher socio economic backgrounds as compared to non-sectarian
private or public institutes. Also, a majority of the institutes are located in the metros
where they generally are attended by students who belong to high income groups. This
might be influenced by students going to foreign institutes for the higher education but
then the cost difference is quite high. But, at the same time there are also a high number
of institutes for the students to choose from. As such the bargaining power of the buyers
is MEDIUM.

4. Bargaining power of suppliers: The main supplier in this case is the teachers and faculty
members. The data on faculty educational qualification reveal that there is much disparity
among the faculty across regions. The low salaries and higher workload in majority of the
private institutions do not make it attractive for them to acquire advanced degrees and to
engage in research.4 This makes the bargaining power of the suppliers LOW.

5. Rivalry among competitors: The rivalry among the competing institutes is mainly due
to the high number of Higher education institutes presently operating in Manila. Though,
the tuition fee for the PHEI are subject to government regulations there seems to be a
disparity between the overall costs between Private and Public institutes. Most of the
students in private sectarian institutes come from higher socio economic backgrounds as
compared to non-sectarian private or public institutes. This is also requires the private
institutes to compete on facilities like air-conditioned classrooms, electronic library and
continuous improvement of physical plant and facilities. Plus, they also offer scholarships
to help make higher education affordable to low income groups. The overall level of
industry rivalry is HIGH.

Considering the overall factors the industry attractiveness for a new player in the higher
education industry is HIGH. For and existing player this is LOW.

4
http://www.asianscholarship.org/asf/ejourn/articles/Kishore%20Joshi2.pdf
Threat of new entrants: HIGH

1. High Flexibility for private institutes


due to low regulations.
2. Autonomy status granted to private
institutes.

Bargaining power of buyers:


Medium
Bargaining power of suppliers: Rivalry: High 1. High Tuition fees mostly for the
1. High number of high income groups.
Low
Private schools 2. High concentration in metros
1. Oversupply of teachers.
(Sectarian and Non- where there is a abundance of
2. Low salaries.
Sectarian) - total wealthy individuals.
1523 schools 3. But the students have a lot of
2. Strong competition chioices.
from public
institutes - 537
schools

Overall Industry
Attractiveness
Threat of substitutes: Low For existing companies:
1. Students more focused on LOW
degree/masters/ professional courses. For new players:
2. High cost of foreign university courses.
HIGH

Key Success Factors: The following are the key success factors for this industry

1. Course with high employment chances: The courses which provide the better and
most immediate employment opportunities are the once that are preferred by the
students. Thus, private higher education institutions that show immediate employment
possibilities of their graduates attract students even if they have to pay higher tuition
fees.5

2. Quality of Faculty: The quality of faculty also determines the favourability of the
course among the prospective students. This quality depends on the educational
qualification of the faculty and research work done by them. Thus, institute should
look at hiring faculty with international exposure and high educational credibility.

3. Business and Academic linkages: The linkages with the industry determine the
future employment opportunities for students. Also, the academic linkages help in
attracting students due to the international exposure and opportunities that they
provide to the students.
4. Infrastructure facilities: Good infrastructure facilities like electronic libraries,
internet connectivity etc. is also important to the student when selecting an institute.

5
Source: http://www.ncspe.org/publications_files/537_OP68.pdf
LOOKING AT THE ANNUAL REPORTS

FEU

The auditor’s opinion of the Consolidated Financial Statements of Far Easter University Inc., and
Subsidiaries state that there are no material misstatements in the financial statements. The annual
report contains how they arrived at key ratios as well as the disclosures contained therein.

Their revenues coming from their educational operations are recognized over the period of the
corresponding school term. For the rental income they receive, revenue is recognized over the lease
term using the straight line method. Interest income is recognized as they accrue using the straight-
line method.

The notes payable of FEU arises from a contract entered with Ayala Land, Inc for the acquisition of a
condominium unit in 2005. This condominium is still under construction and development.

Key adjustment made to the Debt amount is adding the operating lease payments to FRC which are
included in the Income Statement as Rental Expense but are not included in the Balance Sheet. We
took the assumption that FEU has a cost of debt of 10% and discounted the lease payments
accordingly.

The revised Cashflow Statement shows that the operating expenses of FEU is financed by revenues
from income. Their dividend payout ratio is equal to 51% of their net income. Looking at the revised
Cashflow Statement, FEU seems to be paying dividends in excess of the funds available to equity.

CEU
The audit opinion given to the Consolidated Financial Statements of Centro Escolar University is an
unqualified opinion stating that the financial statements present fairly with no material misstatement
the financial conditions and cash flows of CEU.

CEU’s revenue recognition principle states that they recognize income for tuition and other school
fees as earned over the corresponding school term. Auxiliary services and miscellaneous income are
earned when they are rendered. Interest income is earned as accrued and takes into account the
effective yield on the asset.

The liability totaling P231m arises from the property acquired in 2007 and consists of Prepaid Interest
of P100m and P400m payable in 10 annual installments. They have discounted the liability using a
discount rate of 9.70%. CEU amortizes the interest expense using the effective method.
Key adjustment to the liability account is the operating lease for 25 years that started in 2004. The
present value of the lease payments for the remaining 20 years are taken and added to the Balance
Sheet Liability Account to come up with the adjusted amount.

Looking at the revised cash flows, it is to be noted that there is enough cash from operations to fund
operating, financing and investing activities of the university.

COMPARISON FEU vs. CEU

Comparing the Financial Statements of these two universities, we can come up with some conclusions
and an idea of which company to invest in the medium term based on the following categories/ratios:

Disclosure and Accounting Policies:

In terms of disclosures, CEU appears to have a more detailed disclosure than FEU. The notes to the
financial statements are a bit more clearer in terms of computations and details. The revenue
recognition principles appear the same except for the treatment of interest income. CEU is more
conservative due to the use of the effective method of amortizing the interest.

Ratios

There is a difference in the reporting format of the Income Statement between CEU and FEU. For
FEU, the cost of the academic revenues can be clearly segregated from the notes. However, there is
no such clarity in the distinction of the cost of the academic revenues for CEU. To be able to arrive at
the gross margin for comparability, the total revenues are deducted from the operating expense itself.
The EBITDA margin of CEU is higher at 122% compared to that of 109% of FEU. The high
percentages of the EBITDA margin stems from the depreciation and amortization added back to the
Operating Expenses. However, the rest of the ratios paint a better picture of FEU than CEU. The
Debt/EBITDA shows that CEU is higher compared to FEU indicating that the earnings of CEU is less
than that of FEU when it comes to meeting the debt requirements. The FFO to Debt also supports this
with 0.097 of CEU compared to 0.233 of FEU. CEU pays a higher dividend to its stockholders than
FEU as evidenced by the dividend payout ratio of 1.066 and 0.509 respectively. It must be noted
however that the Free Cash Flows available to equity for CEU can support this payout ratio as
opposed to FEU’s FCF to Equity. FEU paid dividends that are much more than the available cash
flows for equity.
Trend Analysis

CEU shows a consistent profit percentage over a three year period at 96%. However, FEU shows
declining revenue from tuition fees with a corresponding increase in interest income and
miscellaneous income. This increase in the above mentioned revenues results from Leases and
increasing investments in Debt and Equity Securities.

The trends also show that the operating expenses of FEU is increasing while CEU is just maintaining
the level of operating expenses. Although FEU shows a higher profit percentage than CEU, it is to be
noted that this percentage is consistently declining in the three year period while CEU is maintaining
at the same level. Another significant difference between the universities is the degree by which FEU
has investments. The available for sale investments of FEU is 31% of its total assets while that of
CEU is at 0.02%.

Decision:

Evaluating the ratios, trend analysis and the Cash flows, it is more advisable to invest for the medium
term with CEU. They have a more conservative revenue recognition principle, healthy cash flows,
revenue from its core business – tuition fees, have higher year on year growth, higher y-o-y growth of
total net income, and better operating expenses.

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