Kip McGrath Education Centres Limited

ASX:KME

Kip McGrath Education Centres Limited

ASX:KME
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$0.400 (-7%)
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#46
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Reports (10) My Report Forum Investors
Forum Topics KME KME #Turnaround

Pinned straw:
Longpar5
Added a month ago

Kip’s best half for a while has me thinking the turn-around is on…..why?

Healthy operational cashflow for the half, after leases about 2.6m (about 10% of market cap). Bearing in mind 1st half is usually the weaker in terms of lesson volumes.

Profits masked by high depreciation - but the capex cycle appears to be over, with only 900k of investing cash flows for the half, down on what has typically been well over A$2m per half lately. Great news, as long as it doesn’t mean they are failing to invest in the business. I think its likely just better capital discipline…..

New Chairman has come in and appears to be implementing this discipline

Debt paid down

Return to a small dividend, I think they could have gone higher, if for example in the next half, when they don’t need to pay down debt there’s another 1.3bn that could go into dividends, somewhere between 2-3c per share. It’s possible the low dividend keeps the turn around under the radar for another half

The US is obviously a regret, however they’re making good cash in spite of likely losses there. With the discipline not to throw good money after bad, I only see it as adding to future performance, maybe one or two more halves to go until rock bottom, but in the medium to long term view I think its nearly as bad as its going to be over there - again - assuming ego’s remain in check and disciplined investment only!

They are consolidating into their better centres, and taking better margins per lesson and per centre. As long as there is enough on the table for franchisees - they need to keep them happy - then this is also positive for the turn-around.

AI yet to have an obvious and meaningful impact on their revenue - they are spinning it as a positive in terms of cost reductions (automated lesson summaries etc). Remains a long term threat for sure.

On the balance of probabilities, I can see Kip easily generating enough cash over the next say 3 years to pay average dividends (annually) of 4cps (this is only about 2.0m in dividends - so I think I’m being conservative especially if they avoid another capex cycle!). If we assume a yield of about 5%, then market cap could sit around 40m, which is near enough 50% upside on today’s price, with a ~8 or 9% dividend on buy price.

Would love to hear others opinions - am I getting giddy?

Shapeshifter
Added a month ago

I took the opportunity this morning to finally exit this one.

Yes they have tightened up the business but what is disappointing for me is the anaemic revenue growth of only 2.4% YoY. This is not looking like a growth business anymore especially on the back of failure in the US.

This became a question of opportunity cost and I see better use of capital elsewhere so although I lost money on this one I'm happy I have the discipline and process to move on.

(Now I just need to decide what to do with Laserbond!)

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UlladullaDave
Added a month ago

Yes they have tightened up the business but what is disappointing for me is the anaemic revenue growth of only 2.4% YoY. This is not looking like a growth business anymore especially on the back of failure in the US.

One of the issues with KME is the mix of GM and high GM revenue streams: The franchise revenue is very high margin, while the corporate centres are a 20% GM business and Tutorfly is a 10% GM business. When you rebase the numbers that way, the adjusted gives GP+Franchise fee growth of 10.5% v pcp. Importantly, imo, the cost jaws have opened up in the last few halves with this being the first H1 since covid to show a profit. To put it in perspective, TF's contribution to gross profit was never more than $340k, it has always been a distraction with very little benefit. I don't think it's part of the growth story.


I actually think this was a solid result.

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15
Wini
Added a month ago

I agree with @UlladullaDave, this is the best result we have seen from KME in years if you look past the the steaming pile of turd that is Tutorfly. Ex-Tutorfly revenue grew 10%, and core Franchising grew 13% which is pretty good even if a good chunk of it came from price increases. ~$1.4m cash NPAT (adding back D&A and subtracting cash capex and leases) is the highest 1H result for many years and given the seasonal 1H/2H skew puts them on track for $3.5-4m for the FY.

Now, should Tutorfly be overlooked? Definitely not considering it is still an operating segment of the business and even if the financial impact has been reduced it would still be taking valuable time and effort away from management and the board. There is no way to sugar coat it, the acquisition has been a disaster. I have always been sympathetic to the idea of expanding to the US, but they simply bought the wrong business. Rather than buying a tech platform and trying to compete in the exam prep space, they should have acquired a small regional small group tutoring business like themselves and slowly understood the operating environment over there.

I'm sure there will be plenty of questions on Tutorfly on the call tomorrow, but my take on the commentary is that if it doesn't see a rapid turnaround in the next six months it will likely be divested or shut down as the new Chairman continues his laser focus on return on investment.

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