G8 Education Limited

GEM Details

FY20 Results Update: G8 Education Limited (ASX: GEM) is engaged in the operation of education centres. The market capitalisation of the company as on 05 March 2021, stood at ~$885.52 million. The company has recently announced its FY20 results and reported that the occupancy levels during the year was better than expected. It reported an underlying EBIT of $105.2 million. The net cash position of the company was at a comfortable level of $21.8 million at the end of the period, on the back of a $301 million equity capital raise during the year. It has reinvested the subsidy received during Q4 in team retention and centre quality. The debt refinance was completed in February 2021, which resulted in the reduction of the finance costs.

CY20 Financial Performance (Source: Company Reports)

Key Risks: The COVID-19 pandemic had a major impact on the sector and the company, as it disrupted its operations and performance. The future performance depends on the easing of restrictions and reduction in the number of COVID cases. The company has also ongoing case of proceedings against it, filed by Slater and Gordon, which it plans to defend in the court.

Outlook: The company expects the positive trend in occupancy levels likely to continue into 2021. It is looking to build a sustainable foundation by securing scale advantages through integrating onto a single set of systems. GEM's focus is to build a quality team and provide differentiated education and care offering to G8's families.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company’s strategic growth priorities in CY21 include the improvement program, network growth and exiting the impaired centres. As per ASX, the stock of GEM is trading above its average 52-weeks’ levels of $0.436-$1.447. The stock of GEM gave a positive return of ~5.07% in the past six months and a negative return of ~14.46% in the past one month. On a technical analysis front, the stock of GEM has a support level of ~$0.9475 and a resistance level of ~$1.2102. We have valued the stock using an EV/EBITDA multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight premium to its peer average EV/EBITDA (NTM Trading multiple), considering the improved cash position with the fund-raising activities, reduction in finance costs and expected increase in occupancy levels. For the purpose, we have taken peers such as Evolve Education Group Limited (ASX: EVO), IDP Education Limited (ASX: IEL), Think Childcare Limited (ASX: TNK), to name a few. Considering the current trading levels, improvement in the net cash position of the company, better than expected occupancy and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.035, down by 0.957% as on March 05, 2021.

GEM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

3P Learning Limited

3PL Details

H1FY21 Update: 3P Learning Limited (ASX: 3PL) is engaged in the development, sales, and marketing of educational software to schools and parents. The market capitalisation of the company as on 05 March 2021, stood at ~$168.07 million. The company delivered a resilient performance during H1FY21 with total revenues of $23.9 million, compared to $23 million in the previous corresponding period. The licence revenue grew by ~4% to $23.7 million, despite the impact of the COVID-19 pandemic. The underlying EBITDA grew by ~26% to $4.4 million in H1FY21, from $3.5 million in H1FY20. Licences volume grew by ~5% to 4.74 million on pcp. There was an improvement in the cash position of the company to $15 million, compared to $12.5 million in the prior period.

H1FY21 Financial Performance (Source: Company Reports)

Outlook: The 3-year long organisational restructure has allowed the company to have a stable cost base, which positions it well for better operating leverage and accelerate on sales growth going forward. It expects single-digit licence revenue and EBITDA growth in the APAC and EMEA regions. 

Valuation Methodology: P/E Multiple Based Relative Valuation Method (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  The company is in advanced stages of discussion with BYJU’S where the company has proposed to acquire 100% of 3PL shares. As per ASX, the stock of 3PL is trading above its average 52-weeks’ levels of $0.600-$1.440. The stock of 3PL gave a positive return of ~56.21% in the past nine months and a negative return of ~11.48% in the past one month. On a technical analysis front, the stock of 3PL has a support level of ~$1.17 and a resistance level of ~$1.25. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe the company can trade at a slight premium to its peer median P/E (NTM Trading multiple), considering the impressive financial performance and decent outlook. For the purpose, we have taken peers such as G8 Education Limited (ASX: GEM), Evolve Education Group Limited (ASX: EVO), and Think Childcare Limited (ASX: TNK). Considering the current trading levels, valuation, resilient financial performance, and growth in licenses, we recommend a ‘Hold’ rating on the stock at the current market price of $1.195, down by 0.830% as on March 05, 2021.

3PL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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