Weekly Reports | Apr 16 2021
This story features REDHILL EDUCATION LIMITED, and other companies. For more info SHARE ANALYSIS: RDH
Who’s top of the class post-pandemic in the listed education sector?
By Tim Boreham, Editor, The New Criterion
With our international borders still resolutely padlocked, the absence of foreign students poses an ongoing existential threat to our universities and other parties feeding off the education ecosystem (such as student accommodation providers).
The listed education providers have not been immune, although arguably those exposed to the foreign student trade have not fared as badly as might have been expected.
The pandemic has also been a boon for providers catering to domestic students or the local training sector, especially if they were already well set up for digital delivery.
The lesson, not for the first time, is that in any given sector it’s not a case of one-size-fits-all. The pandemic has also spurred a keenly contested takeover battle.
With its emphasis on foreign students and English language lessons, vocational training provider Redhill Education ((RDH)) was hard hit by the pandemic, despite posting a modest profit in the six months to December 2020.
Sniffing the blood in the water, rival operator UCW Ltd ((UCW)) lobbed a hostile off-market scrip bid in mid-December.
Another competitor, iCollege ((ICT)), threw its mortar-board into the ring in January, also by way of an off-market bid.
Redhill’s has urged holders to take no action, pending full digestion of iCollege’s bidder’s statement. But as with the Queen, its board is clearly unamused.
Earlier, Redhill’s board accused bidder UCW of “seeking to gain control over Redhill’s significant cash balance [of $25m] to remedy its own weak cash position.”
UCW denies this assertion.
Stockbroker Select Equities estimates that when conditions normalise in the 2022-23 year, Redhill would contribute 65-80% of earnings to a combined Redhill-ICT group and 60-70% in a Redhill-UCW union.
Redhill holders would emerge with only 41% of the first combination and 67% of the second.
But the firm notes that while both takeover proposals present synergy benefits and possible “increased investor relevance”, neither of them offers a sufficient control premium and both are likely to flounder in their current form.
Despite deriving half of its revenue from foreign students, iCollege upped its December half underlying earnings from $673,000 to $2m, with revenue lifting 25% to $8.8m.
iCollege operates eight campuses across five states covering courses in building and healthcare and an IT boot camp in India called the Hacking School.
A vocational and tertiary education (certificate level) provider in the health and community services sector, UCW boosted underlying earnings by 13% to $2.89m, despite revenue slipping 8% to $11.7m
From a strategic viewpoint, both can lay claim to being legitimate suitors for Redhill but in valuation terms, they are yet to prosecute their case.
Both offers are subject to a minimum 90% acceptance.
For IDP Education ((IEL)) – the biggest ASX-listed education play worth $6.6bn – the pandemic was never going to be a good look because the company’s main pursuits are corralling (recruiting) foreign students and English language testing.
IDP Education’s December (first) half revenue declined -29% to $269m and earnings shrunk 49% to $30.4m.
But the numbers could have been much worse. One reason is that while Australia is closed for foreign students, alternative markets such as Britain and the US are open for business. IDP recruits for multiple markets, not just Australia.
IDP has an unusual shareholding, in that 40% of the company is owned by Education Australia, on behalf of 38 universities.
In early March, IDP revealed that Education Australia would transfer 25% of this holding to the universities, by way of an in-specie distribution.
The other 15% will be sold down on market, with a deadline of December 11, 2021.
The sell-down implies IDP shares could be weak in the short term. But in the longer term, the EA decision removes a large share overhang. As for the individual unis, they can buy or sell as they please and given their financial stresses we expect many will do the latter.
Kip McGrath Education Centres ((KME))
Pay attention: you will be tested.
Kids falling behind because of home tuition during the lockdowns played into the learned hands of Kip McGrath, which offers tutoring services via 524 centres in eleven countries.
In an “extremely resilient” half, the company grew online lessons by 800% to 280,000, while the various lockdowns meant total sessions fell around -4%, to 660,000.
Overall, Kip McGrath’s total network revenue – the fees charged by both the franchised and corporate centres – declined -10% to $41m.
The company’s own revenues fell a sedate -2% to $8.5m, with net profit down -19% to $826,000.
Kip McGrath shares hit a record $1.65 in early December. While they’ve eased to the $1.30 level we posit that investors are already factoring in a strong post recover, especially in Europe and Britain which accounts for about half of total turnover.
Janison Education Group ((JAN))
Unlike Mathias Cormann, the provider of schools assessment tools didn’t need a $1m taxpayer-funded charm offensive to win a role with the OECD.
In 2019 the Paris-based body delivered Janison the rights to carry out a program called the PISA for Schools test, across its member countries. PISA stands for Program for International School Assessments and has nothing to do with a famous leaning Tuscan tower.
The five-year deal is – and was – a coup for Janison, which beat several multinational education providers – including UK behemoth Pearson – to the punch.
Janison reports that nine countries had signed up for the test so far, including the US, with the company in March awarded exclusive provider status across 2700 Australian schools.
Janison’s software is used to ‘power’ the Naplan-like assessments, which are a sample-based benchmark of how the schools are faring based on testing 15 year old students.
Janison can either provide the software the country, for a base annual fee of $100,000. Or it can be engaged as full service provider as is the case with the US and here, charging $700 per school.
In all, 90 countries have signed up for PISA for Schools and so these nations can be seen as Janison’s addressable market.
In June last year Janison acquired ICAS Assessments, the University of NSW assessment division and has converted its flagship product ICAS Assessments to fully digital.
Janison’s other roles include facilitating the local accounting body’s professional exams, running uni entrance tests for the Czech Republic and measuring the amount of learning lost during covid for the NSW Department of Education (answer: a lot).
In essence, Janison is all about high stakes and high volume testing, last year delivering 10m tests across 117 countries.
Janison's half-year revenue showed recurring platform revenue grew 88% to $11.8m, while overall revenue grew 40% to $15.9m.
The company halved its reported loss to a $600,000 deficit and more than doubled underlying earnings to $2.8m.
As for Cormann’s OECD appointment, we doubt having a compatriot as secretary-general would harm prospects, either.
Disclaimer: Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.
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