Consensus community valuation
$1.850
Average Intrinsic Value
37.0%
Undervalued by
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##Industry/competitors #Marketi
Added a week ago

Sorry in advance if I'm off the mark but this really stuck out at me. I was trying various google search queries to see what kind of  visibility Kip McGrath has. Search terms included: Maths tutoring Sydney, Maths tutoring Brisbane, Best online tutoring australia, Best maths tutoring ranked, etc etc etc many more similar search queries. Kip McGrath barely ever made an appearance and I checked the first few pages of search results each time.

Now I know the search algorithm will mean different search results for everyone so it might pay for a few of us to repeat this experiment and see what results are returned?

I don't consume any print media or watch TV so I'm ignorant to more "traditional" marketing/advertising exposure that KME may generate.

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#Business Model/Strategy
Added 2 weeks ago

Getting 4.8 on facebook.
3.6 on Glassdoor.

Generally positive reviews for their centres.

Generally speaking, some good reviews around familiar sites. If there is a problem with a private education centre, don't worry, those mothers will be the first to trumpet.

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#Financials
Added 2 weeks ago

Pre-Covid KME was growing their revenues around 25% and recorded $16.2m in 2019. Management were in the process of accelerating investment in the Kip Online system which hit their profit margins a little, but net profits still grew around 17% to $2.7m. At the current market value of ~$71m, KME trades on roughly 27x their pre-Covid earnings which seems fully valued, but Covid has accelerated the value drivers outlined in the Business Model/Strategy straw and I believe will drive a step change in profits over the next few years. I’ve attached a screenshot below of a rough model I have created for KME to demonstrate how I believe the business will change over the next few years.

With only three months left in FY21, the market will turn its attention to the post-Covid recovery in FY22 and if KME can report the ~$3.7m profit I am hoping for I expect the share price to perform well, particularly as the drivers of that recovery (online lessons and corporate centres) will continue into the future.

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#Business Model/Strategy
Added 2 weeks ago

The business is currently undergoing a shift in their business model from the historical franchisee face-to-face tutor lessons. There are two key shifts occurring, both of which will drive increased revenue and profits for KME in the future:

  • A shift to a hybrid online and face-to-face tutoring model. KME launched their proprietary Kip Online system four years ago but traction was slow as parents were wary of the quality of online learning (especially as KME price face-to-face and online lessons the same at ~$63). Pre-Covid about 1.4% of lessons were online, but lockdowns accelerated the shift with 42% of lessons now online in the latest update. Speaking with management, they expect more students to transition back to face-to-face when it is safe to do so, and target between 20-40% online penetration over time.

  • A shift to a blended franchisee and corporate-owned centre network. KME has strategically identified that certain centres in highly populated areas are more profitable if they are run by the corporate office rather than a franchisee. Management are approaching these franchisees and offering a guaranteed buyer for their franchise at a fixed valuation, preferably a mix of cash and shares. This has the added benefit that salaried tutors in corporate centres can service students online who fall outside of a KME centre catchment. Like online penetration, management are hoping to achieve a corporate/franchisee balance of 20-40% over time.

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#History
Added 2 weeks ago

KME is a leading provider of tutoring services to K-12 students, primarily in Maths and English. The business was founded by Kip McGrath in 1976 and has expanded from one tutoring centre in Maitland to 524 centres in 11 countries largely through a franchise business model. It is currently managed by Kip’s son Storm, with the father and son duo still owning ~30% of the business between them.

The core business model is charging franchisees a percentage of revenue which is collected per student, per lesson. KME offers two levels of franchise fees, Silver and Gold. Silver franchisees pay 10% of their revenue and receive access to the KME brand, learning materials and basic administration support. Gold franchisees pay 20% of their revenue and in return outsource more back office functions to KME such as accounting, human resources and marketing which frees time to focus on students and on average Gold franchisees generate more lessons and revenue than Silver franchisees.

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#Bull Case
Added 2 weeks ago

In a few paragraphs, I expect KME can sharply grow lessons over the next few years with pent up demand as parents look to ensure their children have not fallen behind in their learning with the disruptions from Covid.

As online lessons maintain their penetration between 20-40%, more franchisees shift to Gold status as they become more confident in the future.

A conservative and aligned management team continue to make strategic purchases of franchisee centres and grow the corporate network over time, which also allows for further penetration of online lessons into new regions previously not serviced with more salaried tutors available.

Finally, margins should grow strongly on increased revenue from higher margin sources and general scale over fixed corporate costs. With large investment in Kip Online brought forward by Covid and an expanded executive team now in place, this should happen quickly.

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#Bear Case
stale
Last edited 7 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.... On the other hand Gold class gets more students, more advertising and more support so it helps everyone.

During the last 4 months, 20 centres closed, they have not been able to train new franchisees in 5 months and sales for franchises has halved to 14!!  Revenues in Africa and the Middle East are down 22% and have not bounced back as yet.... 

This type of education is unregulated so there could be government intervention, possibly government online offerings that will be offered cheaper/free.

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

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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#Management
stale
Last edited 7 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

Kip recently sold 2 million shares!!!  This is kind of ok, as it is a shit tonne of personal wealth kept in one asset.  Saying that I did not like it at the time, especially while the share price is trading at a discount (to my valuation at least).  

Between Storm and Kip  they still own 21% of the company.

The other directors all seem qualified for their roles.

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#Bull Case
stale
Last edited 7 months ago

Revenue growth through COVID was only 5.2%.  This was not that bad considering how bad it has ruined the global economy.  If KME can get back to previous revenue growth rates of 18% after this is all over then my valuation input of 7% is lame.

Before Covid, KME was investing heavily into their online platform which had a bit of resistance from parents.   During Covid this higher profit margin product was embraced and will likely stick around.

KME has been buying back franchisees and will likely keep pushing students to either their corporate owned centres, or online.  This should create a more steady, higher margin revenue stream over the medium to long term.

 

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#Trading Update - Online shift
stale
Added 11 months 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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