Stocks’ Details

G8 Education Limited

Modest Growth in FY19 Organic Earnings: G8 Education Limited (ASX: GEM) is one of Australia’s largest quality early childhood education and care providers. The company recently updated that Vanguard Group became a substantial holder with a voting power of 5.001%.

FY19 Highlights: In the latest presentation released on ASX, the company noted the impact of COVID-19 on the business. By late March, the education sector had half the level of attendances as compared to those witnessed in the pre-COVID period. After the Government announced the sector relief package, the company raised $301 million via an underwritten institutional and retail entitlement offer, introducing additional liquidity and financial flexibility for the potential uncertainties or to pursue any business opportunities.

During FY19, the company reported 70 major refurbishments at the cost of $21 million. The year was marked by modest growth in organic earnings which was offset by investment in establishing greenfield centres and improvement of centre quality. NPAT for the year came in at $76.4 million, down 4% on the previous year. The company generated $90.2 million in operating cash flow and distributed dividends of 10.75 cents per share. During mid-June, the company’s booked occupancy was ~65%, with physical attendance of ~53%.

FY19 Result Highlights (Source: Company Reports)

COVID-19 Impact & Outlook: Given the impact of COVID-19 on the business, the company reduced the 2020 capital expenditure to $25 million, from $40 million. Moreover, it introduced various cost saving initiatives which are in line with the target. In CY20, the company expects to recognise a non-cash impairment charge in the range of $230 million - $250 million. The company expects the gap between booked occupancy and attendance levels to continue to narrow. GEM’s H1FY20 results are expected to be released on 24^th August 2020.

Key Risks: The education sector has been adversely impacted by the pandemic due to the provision of free education and childcare services, closing of centres, and the threat of infections. Although the country is experiencing increased activity and people movement, it is uncertain whether the momentum will continue. A second wave of infections and reinstatement of restrictions can adversely impact the business. Other risks to the business, include increased competition, delay in execution of strategy, cyberattacks, etc.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company corrected by 15.46% in the last 3 months and is currently inclined towards its 52-week low of $0.437. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in percentage terms). Considering the resilience of the business, cost saving initiatives, decent liquidity position, current trading levels, and key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.830, up 1.22% on 11^th August 2020.

3P Learning Limited

New Agreement Worth US$10 Million: 3P Learning Limited (ASX: 3PL) is engaged in the development, sales, and marketing of online educational programs. The company recently announced that Smallco Investment Manager Limited ceased to be a substantial shareholder. In another update, the company notified that it will be releasing its FY20 results on 14^th August 2020.

Agreement Highlights: In the latest business update, the company informed that it has signed a 12-months agreement worth US$10 million with a National Ministry of Education in the Middle East. Under the agreement, the company will provide Mathletics licences and professional development services. Revenue from the agreement is expected to be recognised in FY21, with a positive contribution to EBITDA. The company also stated that the costs related to the agreement will be recognised in FY20, and hence, will reduce FY20 EBITDA.

H1FY20 Highlights: During the half year ended 31^st December 2019, the company reported licence revenue amounting to $22.8 million, down 2% on the previous year, due to declines in APAC and EMEA. New business billings in the Americas were up 59%. In APAC and EMEA, billing grew by 2% each. Annual Recurring Revenue grew by 6% from 30^th June 2019.

H1FY20 Financial Results (Source: Company Reports)

Outlook: The current economic conditions in the USA have led to budget uncertainty for schools and delays in purchasing decisions, resulting in moderate revenue growth expected for the Americas region in FY20 and lower EBITDA as compared to FY19.

Key Risks: The company has a stronger H2 billings and revenue profile which has been impacted by COVID-19. Since growth in Americas is seasonally skewed to H2, the business continues to be threatened by the economic conditions in the USA. Other key risks to the business include, competition risks, technology risks, privacy and data security risks, exchange rate risk, etc.

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

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of the company gave positive returns of 42.11% in the last 3 months and is currently trading close to its 52-week high of $1.165. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of high single-digit (in percentage terms). Considering the recently signed agreement, new business billings in H1FY20, outlook, price movements, and current trading levels, we maintain a “Hold” recommendation on the stock at the current market price of $1.08 as on 11^th August 2020.

Janison Education Group Limited

Record Gross Margin in FY20: Janison Education Group Limited (ASX: JAN) is a Microsoft education partner, engaged in delivering online assessment events to millions of candidates in more than 100 countries. The company provides two primary offerings – Janison Insights and Janison Academy.

FY20 Results Highlights: During the year ended 30^th June 2020, total platform revenue increased by 22%, on the back of new customer wins in the US, Brazil, and Russia. In addition, the company signed other PISA-for-Schools countries on to the Janison Insights platform. Revenues for the learning division contracted during the year due to two large clients lost towards the end of FY19. In addition, some of the small clients chose not the renew their contracts and others requested for lesser services during the year. The company’s Exam Management business was impacted by COVID-19 as all in-person exams for most of the fourth quarter were deferred until Q4FY21.

P&L Statement (Source: Company Reports)

Despite the above impacts, the company delivered its largest gross margin during FY20 of 46%, supported by the increased proportion of licensing revenue earned for its off-the-shelf platform and assessment products. The company reduced its cost of sales by 19% in FY20 through labour efficiency improvements and optimisation of cloud hosting costs, contributing to an increase in gross profit to $10 million. Operating cash flow for the year stood at $7.5 million, up by $7.3 million on FY19.

Gross Profit & Margin (Source: Company Reports)

Outlook: The management believes that there is a further opportunity for cost reduction in FY21, which, in turn, will increase the gross margin. The company expects to capitalise on a large and growing online assessments market and will continue to invest in sales and marketing, increasing the sales and marketing expenses to 16% of FY21 revenue as compared to 8% of the revenue in FY20. Revenue for FY21 is expected to witness a modest growth, on the back of new customer acquisition, expansion of existing clients, the introduction of Educational Assessment schools’ products, etc.

Key Risks: The company regularly purchases services denominated in US dollars, Singaporean dollars and New Zealand dollars, which exposes it to foreign exchange risk. Other financial risks to the business involve liquidity risk, credit risk, and interest rate risk. Moreover, the COVID-19 related challenges continue to be a potential headwind for the business.

Stock Recommendation: The stock of the company gave positive returns of 40.74% in the last 3 months and is inclined towards its 52-week high of $0.520. As on 31^st December 2019, the company had cash and short-term investments amounting to $4.17 million and total debt amounting to $2.64 million. Considering the performance in FY20, decent outlook, and current trading levels, we suggest investors to wait for better entry levels, and thus, have a watch stance on the stock at the current market price of $0.41, up 7.895% on 11^th August 2020, on account of the announcement for FY20 results.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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