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Dubai's school operator GEMS to focus on cost cutting to counter UAE freeze on fees: Moody's

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Dubai: The UAE’s biggest name in school management, GEMS, will have to focus on student numbers and ‘utilisation rates’ of its schools to improve revenue and profitability. But doing so in an environment still impacted by the COVID-19 pandemic could be tough, according to a new update from rating agency Moody’s.

More so, as local education authorities have put a blanket freeze on schools raising their tuition fees in the new academic year. “While largely anticipated, the restrictions will limit GEMS’ ability to increase its revenue next year – a credit negative,” said Moody’s.

“The ongoing sanitary restrictions and soft macroeconomic environment in the UAE continue to weigh on GEMS’ business.” The rating agency estimates that GEMS’ institutions in Dubai and Abu Dhabi generate 75 per cent of turnover.

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Tide over fee freeze

To compensate for the halt on fee hikes, GEMS will have to implement tighter cost control measures, that include “capping staff wage inflation and reducing discretionary capital spending,” Moody’s adds. “Because the announcements (on the fees) came well ahead of the start of the next academic year in September 2021, the company will have enough time to implement such measures.

“Some of the schools will also remain eligible for exceptional fee increases.”

Transport loss

What have hurt GEMS and other schools is the loss of revenues from operating pick up and drop services for its students as a result of the pandemic-related safety measures.

“With transportation services working at a fraction of its pre-coronavirus utilization rate and extracurricular activities suspended, GEMS reported -$1.8 million of adjusted EBITDA for the segment in the three months to November 2020, compared to $19.8 million in the three months to November 2019.” (EBITDA is earnings before interest, taxes, depreciation and amortisation.)

Future possibilities

The uncertainties will lead to school managements not going for any expansions in the near term, until they see some balancing out in demand for admissions and available seats. In the UAE and elsewhere in the Gulf, schools are also confronting the reality that new admissions are under pressure because of uncertainties related to jobs, drop in income, etc.

This was a point raised by Alpen Capital, the consultancy, which brought out a report on the Gulf’s education sector prospects earlier this week. A senior official had said that it could be a year or more before schools see a turnaround in their prospects.

“The drop in admissions and population numbers will impact revenue and profitability – in such an environment, new schools will be furthest from managements’ minds,” said Krishna Dhanak, Executive Director at Alpen.

Until then – and even longer – new projects could be placed on the backburner. “The increased uncertainty will also limit visibility around the profitability of new school projects, which could lead to a reduced number of new school openings once the market recovers,” Moody’s added.

Which also leaves established operators with a clear advantage – “This could allow GEMS to benefit more strongly from a recovery, given its spare capacity of around 20,000 seats in the UAE and Qatar,” Moody’s added.

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