Kip McGrath Education Centres Limited

KME Details

Purchase of Stake in Tutorfly: Kip McGrath Education Centres Limited (ASX: KME) is engaged in the education business and is involved in the sale of its franchises and also provides services to them. As per a recent update, the company has agreed to purchase a stake of 70% in Tutorfly.com, a US-based tutoring business. Kip will make an initial payment of USD 500,000 for the stake through its newly incorporated subsidiary, Tutorfly Holdings Inc. The founders of Tutorfly Inc will hold the remaining 30% in the company. The company will make a further payment of USD 500,000 to Tutorfly Inc when the company is able to achieve USD20,000 per month net revenue targets.

FY21 Performance Highlights:

The company delivered resilient performance despite the impact of the COVID-19 pandemic on the economy.

• Revenue grew by 12.6% to $19.28 million in FY21, compared to FY20. The rise in revenues were due to the increased traction in online tutoring segment, in the midst of the COVID-19 pandemic.
• EBITDA stood at $5.11 million in FY21, compared to $5.20 million in the pcp.
• There has been an improvement in the NPAT of the company to $1.7 million, reflecting an increase of ~10%, despite the COVID-19 headwinds.
• The operating expenses increased during the period due to a surge in marketing spend, wages & salaries and investment in technology.
• The management paid a full-year final dividend of 1 cent per share.

Trend in Revenue (Source: Analysis by Kalkine Group)

Key Risks: The company is entirely dependent on its technological platforms for its business growth, and any technological challenge to provide a seamless experience to its customers might impact the profitability of the Group.

Outlook: The company will continue to focus on its growth opportunities, going forward and look to increase its lesson numbers. It also plans to leverage on its technology in order to enhance the student experience through automation & analytics. It expects business to grow in the post COVID-19 phase with anticipated increase in customers.

Stock Recommendation: Regal Funds Management Pty Ltd has undergone a change of shareholding in the company and has increased its voting power to 10.20%. The stock of KME is trading at par to its 52-weeks' low levels of $0.99. The stock of KME gave a negative return of ~16.67% in the past one year. On a TTM basis, the stock of KME is trading at an EV/Sales multiple of 2.6x, lower than the industry average (Consumer Non-Cyclicals) of 5.5x, thus seems undervalued. Considering the current trading levels, valuation on TTM basis, resilient performance, improvement in NPAT, optimistic outlook and the key risks associated with the business, we recommend a 'Speculative Buy' rating on the stock at the current market price of $0.990, down by ~1.001% as on 7 October 2021.

KME Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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