Kip McGrath Education Centres (ASX: KME) is a tutoring services business primarily focused on Maths and English for both primary and secondary students. Started back in 1988 by Kip McGrath himself, the company has grown impressively from just one center to 489 centers (450 Franchise and 39 Corporate centers) around the world by the end of FY24. The business remains family-led, with Kip’s son, Storm McGrath, currently serving as CEO, and the McGrath family holding approximately 30% ownership in the company.
How Does Kip McGrath Education Centres Make Money?
KME brings in revenue from three main areas:
- Franchise Network
- Corporate Centers (Initiated in 2019)
- Tutorfly (Acquired in 2021)
Franchise Network
The Franchise Network is KME’s original and most important revenue stream. In FY24, it accounted for about 59% of the company’s total revenue, making it a reliable and profitable part of the business. Franchisees pay a fee based on their revenue, which is collected per student per lesson.
Franchisees can choose between two service levels: Silver, which costs them 10% of their revenue, or Gold, which costs 20% but includes extra backend support, like accounting, marketing, and HR. This allows Gold franchisees to focus more on teaching, which can help them earn more. For many years, KME has been actively working to upgrade centers from Silver to Gold, aiming to enhance profitability for both the franchisees and the company. As part of this strategy, KME has also reduced the total number of centers and converted some into corporate-owned centers.
As of FY24, Kip McGrath Education Centres has 489 centers globally, distributed as follows:
- 188 centers in Australia and New Zealand
- 247 centers in the UK/Europe
- 54 centers in Africa/Middle East
Corporate Centers
After Kip McGrath retired in 2019, his son Storm McGrath started opening corporate-owned centers. The original plan was to strategically place these centers in select shopping malls, but it soon evolved into a way for franchisees looking to exit their businesses to sell them to KME. This approach led to a steady increase in the number of corporate centers, reaching 39 by FY24.
Building this segment has required significant upfront investment in setup costs and employee salaries. While these centers are still working towards profitability, they are seen (by management) as a key growth area for KME. That said KMEtook on some underperforming centers, which they are struggling to turn into profitable locations..
Tutorfly
KME’s expansion strategy—or perhaps a(nother) misstep by the CEO—involved entering the U.S. market. In 2021, KME acquired a 70% stake in Tutorfly, a U.S.-based tutoring business, with the goal of diversifying into other areas of education. By FY 2022, KME had fully acquired Tutorfly, which was then generating about $0.8 million annually. By FY24, Tutorfly’s revenue had grown to $3.4 million in a government-funded environment. However, KME invested a substantial amount for a company of its size and has yet to see a full return on that investment.
Revenue and Profitability Trends
Over the past five years, Kip McGrath’s new ventures, the Corporate Centers and Tutorfly, have begun to significantly contribute to its revenue. By the end of FY24, these two segments made up about 41% of KME’s total revenue.
The following diagram shows how the shift has happened from FY23 to FY24
The impact of these factors on KME’s overall revenue is evident in the graph below. In the second half of FY2024, KME reported a record revenue of $17.5 million, the highest in the company’s history. The upward trend is clearly reflected in the graph below:
However, the costs associated with developing these new business areas have impacted profitability negatively. The company has faced challenges in managing its costs, which has resulted in a struggle to maintain earnings per share (EPS) at previous levels. As a result, KipMcGrath Education Centres cut its dividend to zero in FY 2024.
What happened to Kip McGrath Education Centres in 1H FY2024?
In the first half of FY2024, KME saw strong revenue growth of 20.1%, in an inflationary environment – which I think was exceptional revenue growth.
However, profitability was impacted by a $1.2 million hit to EBITDA, due to costs associated with
- Integrating new corporate acquisitions,
- Scaling challenges at Tutorfly,
- The loss of a significant Abu Dhabi contract.
These factors led to a small net loss of $0.1 million for the period.
What Happened After 1H FY2024?
Miserable first half NPAT brought noteworthy changes and strategic shifts for KME.
Board Changes:
On April 24th, Mr Damian Banks, the former CEO of Konekt, joined KME’s board as a new director.s
Mr Banks’ track record includes leading Konekt through a successful acquisition, where the company’s share price increased from around $0.25 to $0.70 per share following a competitive bid process.
Then, on May 24th, Trevor Folsom announced his retirement from the board, marking the end of his tenure.
Subsequently, on June 1st, Damian Banks was appointed Chairman of the board, with Ian Campbell transitioning to a Non-Executive Director role.
Restructure:
In response to a challenging first half, KME underwent a restructuring, particularly within the APAC region. The company consolidated its management team and implemented cost-saving measures globally. This restructuring, which cost approximately $250,000 in the second half ( based on investor call Q&A), resulted in an annual reduction of about $1 million in employment costs.
Despite these expenses, KME delivered a Net Profit After Tax (NPAT) of $1.366 million in 2H FY2024, the highest in four years—a promising sign of the company’s renewed financial discipline.
Chairman’s view and Financial Report tone:
In the FY2024 financial report, the new Chairman acknowledged that while the company’s Return on Capital was low throughout the year and historical investments have yet to yield consistent returns, the “green shoots” seen in the second half suggest that higher, more consistent returns are achievable with disciplined cost management.
He also highlighted the introduction of new Key Performance Indicators (KPIs) in the FY24 report, designed to give shareholders a clearer view of the business drivers and hold the company accountable for its performance.
Valuation :
KME currently has about 56.9 million shares outstanding, with a share price of $0.41, giving it a market capitalization of around $23.4 million. With $5.4 million in cash, the enterprise value (EV) comes to about $18 million.
If we assume a conservative 10% revenue growth in FY25, bringing total revenue to approximately $37 million, and consider the $1 million in annual cost savings from the recent restructuring, KME could potentially generate a net profit of around $3 million. Applying a price-to-earnings (PE) ratio of just 12, this would give an estimated market capitalisation of $36 million, significantly higher than the current market capitalisation..
Final thoughts
Is KME’s recent restructuring, board changes, improved KPI transparency, and strategic focus on cost management enough to set the stage for a potential turnaround? Or will the CEO pursue another expansion that leads to more excuses rather than results? Is the risk-reward balance appealing, or is it hard to trust management to keep costs under control?
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Disclosure: the author owns shares in KME and will not trade shares within 2 days of publication. The editor Claude Walker does not own shares in KME and will not trade within 2 days of publication. This article is not intended to form the basis of an investment decision. 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).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. A Rich Life does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.Sign Up To Our Free Newsletter