Author Topic: KME  (Read 2069 times)

galumay

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KME
« on: May 20, 2017, 02:52:05 PM »
KME - Kip McGrath Education.

A friend alerted me to this little business, it operates in the online and center based education sector. KME has a franchise model with hundreds of centers around the world where students can get tutoring in Maths & English. The centres have been operating since 1976 and there are over 500 now. KME employ qualified teachers.

Students can also be enroled in the online tutoring which allows students to get tutoring within the home environment thru interactive sessions with tutors.

Below is the discussion Andrew and I have had to date about KME,

"Kip Mcgrath (KME)

Main appeal:

* Management/owners with a lot of skin in the game

* strong recurring cashflows through growing number of tutoring centres

* low, very manageable debt

* 1.6c dividend (4.5%)

* Growth prospects with tutoring in Australia and UK, as well as the online program.

Similar online models are taking off here in China (e.g. VIPKid), so the prospects look at least a decent chance of working in Oz/Uk in my opinion." (Andrew)


I had time to read up on KME and punch the numbers from the last AR into my spreadsheet. There is a lot to like as you point out.

Looking for things to consider on the negative side, there is not much competitive advantage, especially on KME's scale, it could easily be disrupted by a more significant player entering the market - and I havent checked, there may well be existing larger competitiors.

Also, although it has very little debt, KME look to have had its hands in investors pockets a couple of times with significant increase in shares issued over the years. (a new metric I have started considering, look at the increase in % of issued shares per year averaged over the previous 10 years).

Have you come up with any other negatives?

I got a range of IV from 48c to $1.05 and if i take out the outliers its around 75c - that represents a Ben Grahamish margin of safety! (ME)


The issuing of shares also raised an eyebrow for me, as it's also something I look for. The view of unchanged shares on issue over long periods such as SDI or REH makes for a pretty picture in financial strength. Given KME has remained unchanged since 2014, I'm willing to give them a chance to prove they've changed paths. However, it's certainly something worth keeping an eye on and I would be out if more shares were issued.

As for other potential risks:

1. Competition and Lack of a Moat

I'm in two mind about this one. Kip McGrath have built up somewhat of a brand presence, having been around for 40 years and established over 500 franchises (mostly in Australia and UK).

Kumon could be considered it's largest competitor and has a more renowned brand and larger presence. However, they’re not comparable in their offering. Kumon only offers tuition in reading and maths, using their own model. Whilst Kip provide tutoring in writing as well, and it’s more closely aligned with the nations curriculum. From a teacher perspective, I think Kumon’s methodology is more outdated as its Japanese origins lends itself to a rote learning format.

Kip McGrath is also the largest tutoring franchise in the UK, from what I can find. They have 225 stores, whilst the next largest, Explore Learning, had 78 franchises (although 2014 figures).

I think the biggest competitive threat could come from a platform business model like Airbnb or Uber. A non-government initiated tutor accreditation system was recently established in Australia and this could support such a system - with parents and students being able to ascertain the credentials of available tutors.

New Government Regulations on Tutoring Credentials and Working with Children Checks

This came to mind, as the government presently have a hands-off policy approach tutoring. However, Kip are the only tutoring franchise that require tutors to also be qualified teachers. So such a move would actually be advantageous.

I’ll put some more thought into any other negatives, as I am sure I’m missing something (or a lot!).

Second half earnings are seasonally stronger than the first and management stated an expectation for this to be the case again this year. With first half EBITDA of $1.2 million, if second half is conservatively estimated at $1.3 million, that gives an EV/EBITDA of 5. It would also be a 19% boost on last years earnings.

My thoughts are the current price is factoring zero growth and the downside risks from here are minimal. But there’s a good chance I could be missing something!

(Andrew)



HY1 18 A solid half year, hasnt repeated the sort of growth we saw in the PFY, but nothing too concerning, hopefully a much stronger second half to finish the year.....

Well, thats exactly what happened, great result for the full year, A very positive AR released today, profit up 40% to $2m, mcap $28m. Gushing cash with over $5 million in the bank, trailing yield of 4.6%. The increase in profit with almost no growth in revenue is impressive! Almost no fixed assets or CapEx, very low debt, good cost control. A cash conversion machine! My range of IV is $1.20-$1.90.

Market liked the results too, pushing KME up nearly 9%.


Why will this business be around in 10 years? - Once again, its already been around 40 years, so Lindy effect. Parents will only increasingly want tutoring for their kids. Again the growth of populations moving into the first world will only accelerate the sector growth. Should be round in 10 years.

« Last Edit: May 04, 2021, 07:59:55 PM by galumay »

galumay

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Re: KME
« Reply #1 on: November 07, 2018, 12:12:59 PM »
update from DMX Caital,

Kip McGrath Education Centres Limited (ASX:KME) – AGM 26 October 2018; +29% for month
At its AGM, leading tutoring company Kip McGrath noted that its FY18 result (41% increase in profit) was the seventh
consecutive year of increased profits, and said that based on results to date, FY19 will likely continue that trend.
The increase in profit has been (and should continue to be) driven by an increase in the number of students taught. Students being tutored are increasing because of:
1. The global market has shown an annual growth rate in excess of 10% in recent years;
2. The company’s initiative in doing national advertising has yielded significant student growth; and
3. KME’s products and service have improved with the new software that has been written.
We continue to expect strong revenue growth and margin expansion to deliver an EPS increase of 20% in FY19.
« Last Edit: February 28, 2019, 09:39:55 PM by galumay »

galumay

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Re: KME
« Reply #2 on: February 28, 2019, 09:41:28 PM »
H1 19 - A solid result in all metrics, a brief and concise report with no BS.

galumay

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Re: KME
« Reply #3 on: August 25, 2020, 05:35:04 PM »
FY2020. Would have been a good year except for the impact of Covid - as expected. The pivot to online may accelerate the transformation of the business and increase margins going forward, the next 12 months will be interesting to watch.

galumay

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Re: KME
« Reply #4 on: February 24, 2021, 04:48:07 PM »
H1 2021, a disappointing result, went backwards more than I expected, hopefully they can turn it around in the 2nd half.

galumay

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Re: KME
« Reply #5 on: August 25, 2021, 07:55:49 PM »
FY 2021, Well KME did turn things around with a much better second half, cash flow also quite strong considering the cost of firing up the online tutoring due to covid.


galumay

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Re: KME
« Reply #6 on: February 22, 2022, 04:24:07 PM »
Another solid half, very happy with progress.


galumay

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Re: KME
« Reply #7 on: August 23, 2022, 07:09:08 PM »
FY 2022, a bit softer in the 2nd half, still reasonable result. no real surprises, I think they have done ok considering the potential of the impacts over the last couple of years. One thing I couldn't work out was the drop in NTA.






The related party loans were also a concern, loans to directors to exercise their options as they were in a closed trading period and unable to sell shares to fund the exercise of the options.

Brett, the CFO is ringing me tomorrow so I will clear up the NTA & ask these questions about the loans,

So i take it the black out period was in force because the options expired on 31/12/21 and the closed period in the share trading policy being the black out period, came into force on the 31/12/21 and applied until 22/02/22 when the Half Year Report was released?

Given the notice of Application for quotation of securities was issued on 29/12/21, was this not specifically prior to the commencement of the blackout or closed period?

Accepting the blackout period, why were the loans a 5 year term and why 2.59%, doesnt pass the sniff test of being “market interest rate” and it looks like in effect the company borrowed at 2.96% to fund the loans to directors at a discount. It seems the company borrowings were variable and the loans to directors, fixed, that is also problematic.
« Last Edit: August 24, 2022, 06:47:35 PM by galumay »

galumay

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Re: KME
« Reply #8 on: February 22, 2023, 09:37:39 AM »
Very poor result for KME this H1 2023, basically another business paying a dividend out of borrowings. Really poor capital allocation. I am conflicted about continuing to hold this business, red flags for the last couple of reports on various grounds. I will sit it out for a bit longer but need to see some better management outcomes in the next 12 months.


galumay

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Re: KME
« Reply #9 on: March 01, 2024, 08:45:06 AM »
Sold my position in Feb 2024, just not able to execute and too many red flags.