I. Sector Landscape and Outlook
Australian Education Sector Stocks outperformed S&P/ASX 200 Index by 4.66% QTD*
Data Source: Refinitiv, Thomson Reuters, ASX; Price Comparison from *12th August 2020 – 12th November 2020
Analysis by Kalkine: QTD Average price performance of all 10 Australian Education Services Stocks as per GICS Industry Classification including IEL, GEM, 3PL, KME, RTE, AKG, SIT, RDH, ICT, UCW
Australia’s education industry has rapidly expanded in the recent years, with continuous technological developments and positive perceptions about online education driving growth. Edtech companies in Australia engage in providing the required support to improve and expand the provision of online education. According to the Australian Trade and Investment Commission, there are more than 350 Edtech companies supporting the education system in Australia. The country has over 1,000 online education providers, generating ~$3.3 billion in revenue. Going forward, the preference for reskilling and enhanced learning will drive growth in online as well as other modes of education. Improved internet infrastructure and the rollout of 5G is also expected to contribute to the growth of the sector by adding more convenience for consuming content online and enabling faster data transfers.
Figure 1. Steps Towards Innovation in Australia’s Education System
Data Source: Australian Trade and Investment Commission, Chart Created by Kalkine Group
Growth Drivers
Progress in National Broadband Network: Australia’s open-access data network project, NBN, will boost growth in the online education sector through an increase in number of internet connections and increasing the speed of data transfer across the country. Moreover, as the online education market strengthens, NBN will also stimulate software and program innovation.
Figure 2. Progress in the National Broadband Network Rollout
Data Source: nbnco.com.au, Chart Created by Kalkine Group
Early Childhood and Care Relief Package: The Australian Government announced the Early Childhood Education and Care Relief Package in April 2020, under which weekly payments were made directly to early childhood education and care services in lieu of the Child Care Subsidy and the Additional Child Care Subsidy. The package was later extended until 12 July 2020. In addition, all approved early childhood education and care services received a Transition Payment of 25% of fee revenue or the existing hourly rate cap, whichever is lower, instead of Job Keeper Payment.
Increased Undergraduate Places, Short Courses, and School Funding: As per the Federal Budget 2020-21, the Government is enabling around 17,000 additional places in 2021, as a part of the growth in undergraduate places from the Job-ready Graduates Package. The Government expects the demand for bachelor places to significantly increase in 2021. Besides, the Government is also supporting the delivery of 50,000 higher education short courses for reskill and upskill students and the recently unemployed Australians. A funding of $146 million has been announced to introduce a range of programs for better educational outcomes of disadvantaged students and school leavers. Moreover, school funding has increased substantially from $13.8 billion in 2014 to $21.8 billion in 2020 and is expected grow to $34 billion in 2030.
Figure 3. Key Government Initiatives for the Education Sector
Data Source: Budget.gov.au, Chart Created by Kalkine Group
Rising Education Consumer Price Index: In the September 2020 quarter, the Consumer Price Index rose 1.6%, with education reporting a rise in most capital cities due to preschool and primary education following the discontinuation of free childcare. In comparison to the June 2020 quarter, the education CPI rose by 2.1% and, in comparison to the September 2019 quarter, the index rose by 1.0%.
Figure 4. Quarterly Percentage Change in Education CPI
Data Source: Australian Bureau of Statistics, Table Created by Kalkine Group
Growing Employment and EBITDA in the Sector: According to the latest Australian Industry data published by the Australian Bureau of Statistics, employment in the private education and training industry increased by 3.9% for the year ended June 2019 in comparison to the year ended June 2018. EBITDA for the industry increased by 8.7% during the same time frame.
Figure 5. Employment and EBITDA Growth in Private Education and Training (FY17 - FY19)
Data Source: Australian Bureau of Statistics, Chart Created by Kalkine Group
Key Risks
Figure 6. Key Risks/Challenges
Source: Kalkine Group
Decline in International Student Arrivals: According to the Australia Bureau of Statistics, Australia saw only 50 international student arrivals in August 2020, down 99.9% in comparison to the prior corresponding month. Australian universities, and the national economy, have suffered significant losses due to international students not being able to return to campus.
E-Learning Industry Policy Risk: Due to absence of well-developed industry, regulatory and supervision standards with limited business qualification requirements, industry players may face disorderly market competition, which may adversely affect the long-term development of the industry.
Information Security Risk: The quality of network systems, online platforms, and hardware equipment play a key role in defining the quality of services provided. Provisions of education through online mode is subject to attacks by hackers, which may lead to adverse impacts for the business.
Health & Safety Risks: Operators of education centres must ensure physical and psychological safety and health of the children to creating a safe learning and working environment to achieve business success.
Regulatory Risks: Changes in regulations related to e-learning and early learning sector may have an adverse impact on how the business is managed and operated and may prove detrimental to financial health and prospects.
Adverse Economic Conditions: Economic conditions with respect to unemployment rate, low household income and consumption, birth rates, decline in population growth, etc., may impact occupancy levels at education centres and can slowdown enrolment in online courses, thus, impact the sector’s performance.
Outlook: Early learning and childcare providers are working on providing the foundation for children to develop both educationally and socially, in a safe environment. The country’s higher education system is fuelling innovation, driving productivity, and giving students the skills for future success through continuous technological developments in the field of learning. Moreover, Australia is also recognised as a key player in the international education segment due to its outstanding capabilities. Going forward, the sector is expected to thrive on the back of rapid growth in the online segment as the education platforms become more consume-friendly through improved connectivity. In addition, the continuous support from the government will fuel further growth in terms of employment, enrolment, and financial performance.
II. Investment theme and stocks under discussion (GEM, RTE, KME and 3PL)
After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analysed based on ‘EV/Sales’ method.
1. ASX: GEM (G8 Education Limited)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 1.06 Billion)
G8 Education Limited operates early education centres owned by the Group and owns franchise of early education centres.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~19.05% on 12 November 2020 closing price. For the said valuation, we have taken the overall industry median. At the same price, the stock of GEM was offering a dividend yield of ~8.56%.
2. ASX: RTE (Retech Technology Co Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$ 74.53 Million)
The company is a provider of e-learning services and technology. With holding company in Hong Kong, Retech has subsidiaries operating in mainland China, Australia, and Hong Kong.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~20.02% on 12th November 2020 closing price. For the said valuation, we have taken the overall industry median for trailing twelve months (TTM) and applied a 10% discount to arrive at our target multiple considering the sales growth expected over the next twelve months (NTM) period.
3. ASX: KME (Kip McGrath Education Centres Limited)
(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$ 64.50 Million)
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~17.33% on 12th November 2020 closing price. For the said purposes, we have taken industry average TTM multiple for peers such as G8 Education Ltd (ASX: GEM), IDP Education Ltd (ASX: IEL), 3P Learning Ltd (ASX: 3PL), etc. and applied a 10% discount to arrive at our target multiple considering the sales growth expected over the next twelve months (NTM) . At the close price as on 12th November 2020, the stock of KME was offering a dividend yield of ~2.82%.
4. ASX: 3PL (3P Learning Limited)
(Recommendation: Hold, Potential Upside: Low Double Digit, Mcap: A$ 168.07 Million)
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~13.64% on 12th November 2020 closing price. For the said purposes, we have taken peers such as G8 Education Ltd (ASX: GEM), Janison Education Group Ltd (ASX: JAN), Evolve Education Group Ltd (ASX: EVO), etc.
Note: All the recommendations and the calculations are based on the closing price of 12 November 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).
Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.