Before I (GrowthGauge here) delve into the FY25 results, it is important to understand the history of events for KME. This article marks the anniversary of my coverage of KME stock, shown below.
I first covered the company after its FY2024 results when the second half showed signs of improvement: Kip McGrath FY24 – Stronger Second Half
Then I wrote another article after the half-year FY2025 results, where I highlighted both the progress in the franchise and corporate centers and the difficulties created by the U.S. Tutorfly business: Kip McGrath H1 FY25 – The Good, The Bad and the Tutorfly
Since that February 2025 update, three significant developments have taken place that will shape how we interpret the FY 2025 results.
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Retirement of Storm McGrath, the son of the founders
The first came on 5th May 2025, when the company announced the retirement of Storm McGrath after nineteen years as CEO and Managing Director. Storm had “skin in the game” but I was not sure about his capital allocation strategy. Deep down, I think every investor was hoping that he would simply focus on the core franchise strategy.
Melinda Smith Announced As New CEO of KME
Next, on 16 June 2025, the board announced the appointment of Melinda Smith as the new CEO and MD, with her start date scheduled for the second half of the year. Smith brings experience from Goodstart Early Learning, Woolworths and the ATO. Her resume looks well-suited for this role.
KME Exits Loss-Making US Business
Finally, on 24 June 2025, Kip McGrath confirmed it would exit its U.S. operations. The Tutorfly acquisition, once expected to be a growth driver and purchased at some expense, had only delivered losses. Along with the closure of the unprofitable Frisco centre, the closure of the US operations eliminates a distraction.
Taken together, these events make FY25 a year of refocus for Kip McGrath. The company reshaped its leadership, shut down uneconomic ventures, and returned its attention to the strengths of its core business. These decisions came with significant write-offs and pushed the statutory bottom line into a loss, even though the core franchise and corporate centre network performed well. In order to judge the future, it makes more sense to judge the year on the performance of the continuing operations rather than the statutory numbers.
- Statutory Results
- Revenue: $31.9 million, down 1.6% year-on-year
- Net loss: ($5.32 million), compared to a profit last year
- Continuing Operations
- Revenue: $31.4 million, up 8.9% year-on-year
- EBITDA: $7.8 million, up 13.4% year-on-year
- NPAT: $2.29 million, up 53.6% year-on-year
Number of Kip McGrath Centres Worldwide
The following three graphs show the movement of franchises and corporate centers. You can see below that the number of KME Gold Franchise Centres Is Growing.
Although the total number of Silver franchises declined year-on-year, for the first time we did see growth compared to the first half. KME continues to prioritize converting as many Silver franchises as possible into Gold. That said, a handful of Silver centres remain in locations where Gold Partner services aren’t offered, so it’s likely the company will always have some presence in the Silver tier.
Interestingly, for the first time, the number of corporate centres has actually declined. From FY2019 through to the second half of FY2024, corporate centres had been steadily increasing. That trend shifted after Damian Banks stepped in as chairman and pivoted the focus toward profitability rather than simply chasing more centres. It’s encouraging to see that underperforming locations are being closed, a sign of discipline in execution.
On the conference call, Damian explained that the hub-and-spoke model has proven more profitable. By clustering centres within driving distance, overheads can be spread more efficiently. This approach means you don’t need a one-to-one ratio of managers to centres, and tutors can be reallocated across sites, covering higher demand where needed or shifting capacity from quieter centres.
Looking ahead, FY26 will bring a renewed focus on expanding the number of Gold Partner franchises, with more emphasis on multi-centre operators who can generate better returns on investment. Whether this strategy proves successful will depend on execution, but based on Damian’s track record so far, the approach looks measured and effective.
KME Revenue From Continuing Operations
Following chart shows the trend for revenue from franchise and corporate network ( I have try to adjust previous year’s tutorfly revenue as best as i could to see the trend in continuing operation revenue).
KME Net Profit After Tax (NPAT) From Continuing Operations
The chart below shows NPAT for continuing operations for 2HFY25. I haven’t adjusted for previous years for comparison. Total loss from discontinued operation was roughly around 7.6 million so the statutory NPAT was a loss of $5.3m for FY25.
KME Free Cash Flow
The chart below highlights Kip McGrath’s free cash generation since 2016. Up until 2019 the focus remained squarely on the core business. From 2020 through to 2024, the company shifted towards a more aggressive corporate strategy, including the well-known Tutorfly investment. It wasn’t until the second half of 2024 that signs of renewed financial discipline began to emerge (I have calculated free cashflow as Net increase/decrease in cash and adjust for loan drawdown/repayment, cash received for share issues, cash paid for acquisitions, and dividends.)
This improved free cash flow has allowed Kip McGrath to strengthen its balance sheet to a small net cash position over the last year.
KME Capital Allocation and Insider Confidence
Alongside the FY25 results, KME announced the launch of a share buy-back program, set to begin on 9 September 2025. The buy-back will be funded entirely from existing cash reserves and, in my view, sends a strong message from the board that the current share price undervalues the business.
That message was reinforced just days later when Executive Chair Damian Banks purchased an additional 200,000 shares on the market, taking his total holding to 1 million shares. Importantly, all of these shares have been acquired on the market in recent periods.
The FY25 presentation also gave useful insight into the company’s capital spending priorities over the next few years, which is expected to remain disciplined. For FY26, total capex is projected at ~$1.7m with the bulk directed toward technology.
Management’s FY26 outlook guides to mid-single-digit revenue growth and NPAT growth in the low double digits with operational leverage expected.
At the last traded share price of 55.5 cents, Kip McGrath’s market capitalisation sits at about $32m. Continuing operations produced a profit of almost $2.3 million in FY 2025. If we believe that will grow 10%, that implies a profit of over $2.5m in FY 2026. That implies a FY 2026 P/E ratio of under 13 for a profitable net cash company with mild to decent growth potential.
KME’s core business has always been a solid cash generator. The real challenge in recent years was distraction from uneconomic ventures. Under Damian Banks’ leadership, there has been a sharper focus on returns and a willingness to cut unviable segments. That shift bodes well for the company’s future.
Of course, no investment is without risk. The key questions I’ll be asking myself are:
- Will KME remain disciplined about generating cash and returning it to shareholders through dividends or buy-backs?
- How effectively will the new leadership execute the multi-centre strategy across both corporate centres and franchises?
- Tutoring remains a fragmented and competitive industry. Pressure from both low-cost providers and online tutors could impact margins. So can KME maintain margins?
- How might the rise of AI tools affect demand for human tutors in KME’s core age group?
Disclosure: The author of this article owns shares in KME. The editor, Claude Walker, also owns 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 Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
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