Consensus community valuation
$1.430
Average Intrinsic Value
38%
Undervalued by
Active Member Straws
#Business Model/Strategy
Added a month ago

Whenever a company pivots its strategy generally risk increases and reward potentially increases.

 

KipMcgrath is a franchise model. They provide software, branding and a curriculum to tutor’s who are generally qualified teachers primarily in the UK, Australia and NZ. They take 20% of the top line + marketing fee’s for this service. This is towards the upper end of fees for franchise businesses and has increased in recent years from 10%. This has helped increased profits but now the majority of centres are paying the new higher fee.

 

My observation given recent announcements is that KME would now like to transition to an online tutoring business. This is understandable as it is likely a more highly valued business model, see Clueys implied valuation of 100m. They have also recently purchased four brick and mortar centres in Australia to be run by them.

 

This is risky.

 

Franchises have the unenviable position of balancing employee’s, franchisee and shareholder expectations. Let any get too unbalanced from the other and watch and RFG style implosion occur (minus the debt). Increasing the fee from 10% to 20% was already a step that greatly favoured shareholder Vs Franchisees.

 

To corporate I’m not sure how online lessons are different from in centre lessons. They are not responsible for the rent or bills associated with the premises required. They clip the same fee regardless of how the lesson took place. Alternatively they may direct incoming online requests to their new network of tutors they are employing through the corporate owned centres. This however would likely cannibalise franchisee businesses putting at risk their proven successful model.

 

I’ll be watching with interest as to how KME balance the various stakeholder interests. Hopefully they can find a synergistic solution where everybody wins or I suspect ultimately no one will.

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#Financials
Added 4 months ago

KME has no debt, has not been diluting shareholdings unnecessarily.

They pay a fully franked dividend of 4c per share... At 91c a share it is a 4.4% yeild.  The payout ratio is 42% of NPAT.  I believe this leaves the dividend relatively stable, and also ample money to reinvest into the business.

EBITDA grew 27.6% last financial year 2018-2019.

 

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#Bull Case
Added 4 months ago

If KME can continue to create benefit through advertising, and back of house management to their franchisees their growth rates should continue to grow revenue above 20%  into the future.

During the Brexit, KME has continued to perform strongly, so this suggests a need in the market that KME meets.

KME have recently been establishing "Corporate Owned Centres" in shopping centres.  This will likely create steady revenue over the medium to long term, while also promoting their online lessons.

KME has been investing in technology to make both the customer, and franchisee's experience better, and also the Franchisee more profitable.

If they can continue to increase their dividend, or keep it steady, the share price should follow it up.

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#Management
Added 4 months ago

Kip McGrath is basically a family/Founder run Company.

Kip, started the business in his garage with his missus, teaching kids after school in 1976. 

Kip retired from CEO, handing the reigns to his son Storm, and is now non Executive Chairman

Between Storm and Kip  they own 38% of the company.

The other directors all seem qualified for their roles.

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#Business Model/Strategy
Added 4 months ago

KME:ASX  do after school lessons in English and Maths, usually one lesson a week.

KME is the biggest player in this highly fragmented market.  Their revenues are tied to their franchisee's sucess....So the busier they are the more Kip McGrath earns.  

Their biggest market is the UK/Europe, 51%, followed by Australia, 42%, and the rest(Middle East and Africa) is 7%.

 

 

 

 

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#Trading Update - Online shift
Added a month ago

29 May 20: Prior to Covid-19, 36,000 face to face lessons and 550 online lessons per week.  Last week, 20,000 online lessons and 2,400 face to face lessons.  While total lessons are still down, shown a significant shift in the way business will be delivered in the future.

 

Made significant changes to the costs base and remain CF positive.  Rev for 10 months to 30 Apr is $14.3m, +12.4% pcp and expected to be ahead of last year for FY20.  Cash position similar to start of FY.  EBITDA is slightly lower than previous 10 months. 

 

Reached a pivotal point in how we deliver education.  Exponentially accelerated this change from what we believed would take years to months. 

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#Bear Case
Added 4 months ago

KME could be screwing their franchisees by charging them up to 20% of their revenue for their Gold class franchisees and 10% for their Silver.  This could create a bit of a pushback where the teachers might not see the value in that relationship.

This type of education is unregulated so there could be government intervention.

The teachers or bad press could severely harm the business..This is your childs future after all.

There could be risks in their online offering not being recieved well.

Speaking to a special needs teacher, I found out children are learning different today than when I was a child because of their attention span, due to the internet, also the amount of crack babies that have the same characteristics of "A.D.D".... basically I hope that they are a step ahead of this trend, and also hope this trend stops.

There have been bad reports from teachers teaching different age groups in the same class....some micro management (which could be a good thing).

There have been bad reviews from a range of parents who say that the classes were expensive and had a poor result.

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#Bull Case
Added 6 months ago

potentially in play for a takeover

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#Bull Case
Added 4 months ago

With schools being disrupted so much, KME could benefit from extra tutoring sought by parents

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