When I first wrote about the turnaround possibility of Kip McGrath Education Centres (ASX: KME) on August 23, 2024, its market capitalization was around $23.4 million. After the 1H FY25 results, as I write this article, KME’s market cap stands at $27.6 million, an increase of around 18%.
So, does this confirm that Kip McGrath’s “green shoots” are turning into a sustained recovery, or is this just a temporary bounce that could fade away? Let’s break down the 1H FY25 results and find out.
Kip McGrath (ASX: KME) Performance Metrics
- Revenue of $15.3 million, up 2.4% YoY.
- EBITDA $3.4 millio,. (up 46% YoY).
- NPAT of $616K, an improvement from a $72K loss in the prior corresponding period.
- Franchise revenue grew 13%.
- Corporate centre revenue grew 5%.
- Tutorfly revenue collapsed by 78%, from $1.3 million to just $0.3 million!
My key takeaway from the H1 FY 2025 results is that despite the disaster at Tutorfly, the core business is heading in the right direction. Let’s dive in to take a closer look at why I think this.
Capital Discipline and Shareholder Returns – Early Proof of a Strategic Shift
In my earlier article, I highlighted that the new board had the potential to shift KME’s focus towards improving Return on Invested Capital (ROIC) rather than chasing aggressive expansion. The 1H FY25 results provide the following evidence that this shift is happening
- $3.2M in operating cash flow, allowing for $1.4M in debt repayment, bringing the company to a debt-free position.
- CAPEX was reduced, with $0.9M invested compared to $2.7M in the prior period.
- Declared an interim dividend of 0.5 cents per share.
- Franchised centres saw a strong jump in contribution margin from $10,111 to $15,340, indicating that the company is extracting more value from the average franchisee.
These validate the hypothesis from my earlier article—that under the leadership of the new chairman, Damian Banks, KME is moving to a more disciplined approach. While it’s still early days, these are encouraging signs that management is walking the talk.
Key takeaway from Investor Conference Call
These are my notes, so they aren’t word-for-word, but they capture the essence of the discussion (or at least, what I understood from it).
Tutorfly – Not an Exit Yet
Despite the massive revenue decline, management and the board still believe Tutorfly is worth holding onto. They’ve cut costs and are running it with minimal staffing to keep the option open for a potential turnaround. Their gut feeling is that school programs in the U.S. could return towards the end of FY25. There’s also the potential for shared cost structures between Tutorfly and the US corporate centre, meaning the CEO could oversee both businesses to improve efficiency.
Franchise Transition – Silver to Gold Shift in action
KME expects to complete the Silver-to-Gold transition within 12–18 months. Around 20 Silver centres may drop off instead of upgrading. Global contracts, a new contract type introduced in this half-year (mainly in Africa) don’t have a Gold-tier option, so the company is factoring that into its transition strategy. At full transition, average franchise fees could rise to around 18.5%, up from the current 17.9%.
Centers organic Growth Still in a Holding Pattern
The real organic growth for Gold centres will likely come only after the Silver transition is completed. Right now, sentiment remains conservative, which means KME isn’t seeing a big spike in new centre openings. A key historical factor: During COVID, 30% of all lessons were funded by governments, but today, that number has dropped to just 1%.
Capital Allocation – More Caution This Time
When asked how they plan to use cash now that they’re debt-free, management did not mention acquisitions. The focus is fully on the franchise transition and improving unit economics. There was also an acknowledgment that they were too aggressive with corporate centre rollouts in the past. Going forward, KME will only open 6 to 8 corporate centres per year, a much slower and more disciplined approach. A new debt facility is available, but it will only be used for converting bigger, profitable centres into corporate-owned locations.
Kip McGrath Education Centres (ASX: KME) Revenue
The following graph illustrates KME’s revenue trend. Historically, KME results are more weighted to the second half of the year.
Kip McGrath Education Centres (ASX: KME) Debt
The following graph shows the company’s debt trend. It is debt free essentially so it will save around $160K a year on interest and that will fall straight to the bottomline.
Number of Kip McGrath Centres Worldwide
The following three graphs show the movement of franchises. You can see below that the number of KME Gold Franchise Centres Is Growing
…and the number of KME corporate centres is growing…
…but the number of KME silver franchise centres is declining.
KME Net Profit After Tax (NPAT)
As mentioned earlier, KME’s performance has historically been more weighted to the second half. Therefore, I still expect FY25 NPAT to hit $3 million, which aligns with my earlier estimate.
KME Share Price And Valuation
Edit 8.45am Friday 28 February: KME shares last traded at $0.485, giving the company a market capitalization of $27.5 million. While I previously estimated its enterprise value (EV) at around $22 million by subtracting net cash of $5.7 million, Luke Winchester pointed out an important correction — $2.2 million of this cash is restricted and held on behalf of franchisees, meaning it is not available for use by the consolidated entity. Adjusting for this, KME’s unrestricted cash is approximately $3.5 million, resulting in a revised EV of around $24 million. I appreciate Luke for highlighting this nuance.
That said, my view remains: while the company has faced challenges, particularly with its Tutorfly business, but it has maintained a solid financial position.
For the first half of FY25, KME generated $1.7 million in free cash flow, which highlights its ability to stay efficient and profitable despite ongoing pressures. For FY25, I expect the company could generate roughly $4 million in free cash flow. With the potential for growth in future years, a market capitalization of $27 million seems like a favorable risk-reward scenario. It will be important for management and the Board to remain focused on disciplined capital allocation moving forward.
While there is no guarantee that KME will achieve the $3 million in NPAT I believe it could achieve FY 2025, it does seem to be on a path to meeting or exceeding that target at some point before too long. Therefore, I still believe that the current price offers an attractive balance of risk and reward to shareholders. There is no doubt that the H2 FY 2025 result will give us important information about the turnaround trajectory.
Disclosure: The author of this article owns shares in KME. The editor, Claude Walker, does not own shares in KME. Neither will trade KME shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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