@Valueinvestor0909 A disappointing result. On it's own it's probably not too bad, by far the biggest hit was the loss of the Middle Eastern contract which was always a bit of a sugar hit as it was effectively licensing income for KME for a temporary Government tutoring program organised through their main regional franchisee. However it should have been flagged better that the program wouldn't continue, at least not to the same scale it did last year.

Even the corporate centre impact of underperforming centres could be easily accepted as KME has been rationalising their centre network for the last couple of years to remove underperforming or uneconomic centres. You would prefer they just close these centres but the line "For the brand we have incurred this cost as it is important for the business overall" suggests maybe some franchisees were disgruntled and perhaps threatened legal or media action if KME did not honour a corporate buyback (they have guaranteed buybacks for franchisees over a minimum student threshold).

But while you could excuse the impacts as a stand alone, it is the context of three years of muted profits that this result comes as one more gut punch. Even adjusting for the significant items management outlined (which you shouldn't completely, Tutorfly also made a loss in the 1H last year) EBITDA would have only grown in line with revenue meaning they wouldn't have scaled anyway. I think the Corporate strategy in it's current form needs to be reviewed because it is clearly not showing up as a benefit economically.

The only silver lining which has been constant over the past few years is the remarkable strength of the Franchisee segment, which only adds a further black mark to capital allocation given the underlying profitability. FY19 was the last "clean" year, where KME did $2.6m NPAT on $16.2m revenue, with the main driver $12.3m in franchise fees. Fast forward to this year and even if KME hits their big 2H recovery they will do <$2m NPAT on over $30m revenue, but importantly despite a rationalisation of the network and Corporate cannibalising centres, they will do >$15m in franchise fees. That level of high margin revenue should be translating to $3-4m NPAT, and says a lot about the profitless revenue currently being generated in the other segments.

There was certainly a tone shift in the commentary of this report, hopefully Storm has realised shareholders are fed up and will start getting serious about the cost base of the business which has clearly become inflated.