Evolve Education Group Ltd

EVO Details

Evolve Education Group Ltd (ASX: EVO) is one of the top players in providing childcare and education in New Zealand and Australia. The market capitalisation of the company stood at ~$182.68 million as on April 21, 2021.

Result Highlights

The company has changed its balance sheet date to 31 December as compared to 31 March earlier during CY20, hence its audited results for FY20 include the performance for 9 months from 1 April 2020 to 31 December 2020. The company’s revenue was $102.6 million for FY 31st December 2020 (i.e. 9 months to 31 December 2020) as compared to $140.6 million in 12 months ended 31^st March 2020. Its underlying EBITDA was $15.7 million for FY 31^st December 2020 ( as compared to $8.2 million in FY 31^st March 2020).

Financial Snapshot (Source: Company Reports)

On an Expansion Mode

The company, on 5 March 2021, announced that it has contracted to acquire 10 childcare centres in Australia which have an overall licensed capacity of 816 children per day. Following the acquisition, the overall number of centres of the company increased to 116 in NZ and 20 in Australia. This acquisition will be funded through the existing cash balance. However, this acquisition is subject to customary approvals. It includes an upfront payment of $27.13 million for EBITDA generation of $6.93 million per annum and a deferred payment of $5 million towards garnering EBITDA of $1.27 million after the 12 months of settlement.

Successful Completion of Institutional Share Placement

The company, on 1 April 2021, declared that with a strong response from existing as well as fresh institutional investors, it has managed to successfully place A$21.7 million worth of institutional shares. Of total shares, EVO will issue ~19.7 million new fully paid ordinary shares of the company at a price of A$1.10 per share, which was at 7.9% discount to the closing price of the company’s shares on ASX on 30 March 2021. The company will utilise the funds from the placement to meet the growth requirements and to tap acquisition opportunities in Australia.

Key Risks

The operations of the company are exposed to various financial risks which include market risk as well as credit and liquidity risks. Besides, the health and safety risks of children also pose a concern for the company. Also, the Covid-19 had hurt its operations and its centres in New Zealand remained closed under alert level 4 and limited operations under alert level 3.

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

Outlook

Following the restructuring of board in September 2019, EVO has witnessed stabilization in occupancy level, the streamlining of support office functions, a reduction in Board fees and curtailment of fee discounting. Besides, it has further deepened its presence in Australia with the acquisition of 10 centres in the last quarter of 2019. The company also has a healthy liquidity position following the issue of A$35 million of five-year notes in December 2020, of which it utilised the partial proceeds towards repaying the bank facilities from ASB while the remainder has been earmarked for future acquisition in Australia. The company’s action plan and healthy balance sheet positioned it well for acquisitions in Australia while continuing to progress on operational improvements in NZ.

Meanwhile, EVO has noted that the recent contracted acquisitions will be EPS positive from the settlement. Besides, it plans to start distributing dividends from Q4FY21.

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands® with the upper band suggesting overbought status while the lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack. https://www.bollingerbands.com/

Barring 2-3 incidences of the stock moving beyond the 23.6% retracement level of $1.253, the stock has largely been trading in the range provided by 23.6% retracement level of $1.253 on the upside and 38.2% retracement level of $1.114 on the downside. The stock has given close at $1.145 for the ongoing week. The technical indicator RSI with a reading around 50 and a flattish curve at the end, suggests flattening of bullish momentum for the stock.

Going forward, the stock may have resistance around $1.253 whereas support could be around $1.114.

Stock recommendation

The stock rose by ~55.90% in 6 months and by ~43.30% in 9 months. However, the stock fell by ~6.58% in 3 months. The stock made 52-week low and high of $0.528 and $1.480, respectively and it is trading slightly towards the 52-week higher levels.

Considering the aforesaid facts, we have valued the stock using P/CF multiple-based illustrative relative valuation and have arrived at a target price which reflects a rise of low double-digit (in % terms). We believe the company can trade at a slight premium to its Price/Cash Flow Multiple (NTM) (Peer Average) considering turnaround in NPAT and rise in net cash flows from operations.

Considering the rebound in net earnings in FY20, business growth strategies, decent balance sheet with a healthy liquidity position and associated risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.135 per share, down by 0.874% on 21^st April 2021.

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.

EVO Daily Technical Chart (Source: Refinitiv (Thomson Reuters))

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