Kip McGrath Education Centres Limited

KME Details

Acquired Four Corporate Centres: Kip McGrath Education Centres Limited (ASX: KME) is engaged in selling franchises and services to franchisees in the education industry. It is increasing the number of corporately owned tutoring centres. KME operates in Australia and overseas, mainly in New Zealand and the UK. As of 7 May 2021, the company’s market capitalisation stood at ~$66.84 million. On 1 April 2021, KME announced the acquisition of corporate centres (four) in Melbourne and Brisbane for $0.4 million. It also notified the New Lambton Corporate Centre’s re-opening in Newcastle for School Term 2 in April 2021. With these new centres, KME reported its active corporate centres in Australia and New Zealand to 12.

1HFY21 Key Financial Highlights: The company reported a revenue of $8.54 million, down by ~2.2% YoY in 1HFY21, due to the COVID-19 impact. This was, however, offset by the growth of online tutoring on KME’s platform. KME reported delivery of 290K online lessons for 1HFY21, up by 800% YoY. It posted an increase of 19.3% YoY in NPAT to $826K for 1HFY21. With the rise in corporately owned centres, KME now operates Corporate Centre hubs in Sydney, Newcastle, Canberra, and New Zealand.

In September 2020, KME paid a fully franked final dividend of 2 cents per share for FY20. It distributed an interim dividend (fully franked) of 1 cent per share on 24 March 2021. It held cash and cash equivalents of $11.823 million as of 31 December 2020.

Growth of Online Tutoring, FY19-FY21 (Source: Company Reports)

Key Risks: The Company is exposed to the risk of decline in student attendance and face to face lessons, as well as centre closures due to the pandemic crisis. Business operations and instruments are also exposed to foreign currency risk, credit, and liquidity risks.

Outlook: With the recently acquired centres in its portfolio, KME expects the students attending lessons at corporate-owned operations to increase over 2,300 per week by mid-April. It also estimates a positive impact of $0.9 million on its revenue for FY2022 and a $0.2 million impact on its EBITDA. The company is looking at options to acquire corporate centres in the UK market as well. KME has planned to launch its new software for the franchisees in 2HFY21 for more effective tutoring methods.

Stock Recommendation: The stock of KME gave a positive return of 31.44% in the past nine months and a positive return of 37.09% in the past one year. The stock of KME has a support level of ~$1.16 and a resistance level of ~$1.357. The stock is currently trading slightly above its 52-weeks’ average price level of $0.890 - 1.645. On a TTM basis, the stock is trading at a price to book value multiple of 3.8x, lower than the industry (Consumer Non-Cyclicals) average of 6.8x, and thus seems undervalued. Considering the current trading levels, increase in NPAT in 1HFY21, an interim dividend paid in April 2021, increase in Corporately owned centres, online tutoring growth, decent outlook for revenue and EBITDA in FY2022, planned inorganic growth in the UK, valuation on a TTM basis and related risks of pandemic disruptions, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.275, down by ~0.391% on 7 May 2021.

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

Slater & Gordon Limited

SGH Details

Growth in Top-Line and Bottom-Line in 1HFY21: Slater & Gordon Limited (ASX: SGH) is a legal services provider in Australia. As of 7 May 2021, the company’s market capitalisation stood at ~$101.53 million. SGH reported $99.3 million in revenue, up 10.7% YoY for 1HFY21, due to higher average fees realised from the improved case mix. It posted a higher EBITDA of $18.8 million and an NPAT of $3.1 million for 1HFY21 versus a net loss of $0.6 million in 1HFY20. The improved financials are due to the transformation benefits of tighter working capital management, business growth in both product lines- Personal Injury Law (PIL) and Class Actions portfolio. SGH saw 16% growth in enquiries and a 6% increase in active files for 1HFY21. It posted $6.4 million of net cash flows from operations in 1HFY21. During 1HFY21, SGH repaid $5 million to Super Senior Facility (“SSF”) lenders and fully paid the Disbursement Asset-backed facility. It held a cash and cash equivalents balance of $19.73 million as of 31 December 2020.

1HFY21 Result Highlights (Source: Company Reports)

Key Risks: The company’s team in Victoria is exposed to the risk of COVID-19 led lockdowns. SGH is also battered by reduced activity in some parts of the legal process and lower settlement volumes due to the pandemic restrictions. Notably, the company is seeking/renewing a finance facility at cost-effective terms.

Outlook: SGH intends to reduce its gearing further over time. It plans to grow through service differentiation by training lawyers and brand campaigns, delivery of social justice (seeking compensation for over 1,300 asylum seekers) and building scale digitally via the implementation of Digital Management Solution. The company has increased the number of roles in its Civil practice and Class Actions and expanded the partner & referral program with Australian Family Law. This, in turn, aids the company to foresee a growing market for both the PIL and Class Actions segments.

Stock Recommendation: The stock of SGH gave a negative return of 25.88% in the past six months and a positive return of 21.67% in the past year. The stock is currently trading lower than the 52-weeks’ average price level of $0.570-$1.485. The stock of SGH has a support level of ~$0.345 and a resistance level of ~$3.92. On a TTM basis, the stock of SGH is trading at an EV/Sales value multiple of 1x, lower than the industry (Professional & Commercial Services) median of 3.2x, thus seems undervalued. Considering the current trading levels, increase in revenue, earnings, and NPAT, growth in Work-In-Progress PIL and active files in 1HFY21, plans to reduce gearing over time, valuation and related risks of pandemic restrictions, lower fees, and settlement volumes, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.730 as on 7 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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