I (Growthgauge here) have been following the turnaround of Kip McGrath Education Centres for a couple of years now, and you can find my earlier articles here. Below, I’ve sketched out the turnaround story so far.
Kip McGrath Education Centres (ASX: KME) H1 FY 2025 Results Analysis
Since the FY25 update, the two most significant changes have been the appointment of a new CEO, Melinda Smith, and a new CFO, Adrian Sturrock. The 1H FY26 earnings call was the first one conducted by the new CEO and CFO. My initial impression is that they seem trustworthy and frank.
For the first time in a long time, KME conducted a comprehensive and independent survey of every single franchise within their network and they got 70% franchise feedback which in my opinion is a good engagement level.
The CEO shared an anecdote during a conference call that one of their larger franchisees had stopped actively growing and hiring extra teachers because they believed KME would be out of business in a couple of years. This is obviously not realistic, but does suggest a suboptimal relationship between the business and its franchisees.
Based on surveying franchisees, Kip McGrath is attempting to improve the service it provides them. For example, thanks to new software features, franchisees now have complete visibility of their business metrics, which will help them better understand and manage their own operations.
As the upcoming charts will show, the business has historically been transitioning franchises from Silver to Gold contracts. However, this half marks the first time in the last 5 years we have seen a reduction in the total number of Gold franchises as well. Addressing this during the call, the CEO cited the “health of the total system,” noting that “It is very important as a new CEO to establish a strong foundation from which we will grow.”
It appears the new CEO came on board, conducted the network-wide survey, and decided to improve the health of the franchisee network by cutting some of the less healthy operations.
If you accept that reasoning for the drop in center numbers, the next question is: where will the growth come from?
The CEO indicated that growth will not come from transitioning the remaining Silver partners to Gold or from corporate centres, but rather from the franchise network. This is a realistic goal that requires less capital than growing corporate centres thus allowing for improved free cash flow. Existing corporate centers are now being treated as “guinea pigs” for testing system changes.
Taken together, 1H FY26 represents a period of laying the groundwork for future growth under new management. It makes more sense to judge the performance of the continuing operations rather than the statutory numbers which include write-downs associated with the ill-fated foray into the USA.
- Continuing Operations
- Revenue: $15.2 million, up 1.6% year-on-year
- EBITDA: $4.3 million, up 3..9% year-on-year
- NPAT: $1.5 million, up 15.4% year-on-year
Number of Kip McGrath Centres Worldwide
You can see below that the number of KME Gold Franchise Centres has declined. This is the primary negative takeaway from this result. At this stage, I believe the new CEO has cleared out the less profitable Gold businesses. However, for my investment thesis to play out, this number must start growing again within the next 12 months.
The total number of Silver franchises declined year-on-year, though we did see a brief uptick in the second half of FY25. A handful of Silver centers remain in locations where Gold Partner services are not viable, meaning the company will likely always retain a small Silver-tier presence.
Importantly, the number of corporate centers was flat. 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.
In the chart below I have attempted to track revenue from the underlying continuing business, by excluding prior revenue from (the discontinued) US Tutorfly business.
The following chart shows the Kip McGrath Education Centres debt, demonstrating the relative strength of its balance sheet, today.
The chart below shows NPAT for continuing operations across 1H FY25, 2H FY25, and 1H FY26. I have not adjusted the older historical years. For context, the total loss from discontinued operations in FY25 was roughly $7.6 million, resulting in a statutory NPAT of -$5.3 million. For 1H FY26, there was a $229k benefit from discontinued operations, which I have excluded from the NPAT figure to show the underlying operational result.
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 dividend payments.
At the last traded share price of $0.55, Kip McGrath’s market capitalization sits at about $30 million. In 1H FY26, the company generated $2.4 million in free cash flow. Even if we simply double that to $4.8 million for the full year (ignoring that KME historically enjoys a stronger second half), the price is somewhat compelling.
Even taking a conservative view of it, the company seems capable of sustainably making at least $2m profit per year, and possibly quite a bit more. With over $6m cash, it can continue to buy back shares for quite some time (and is regularly doing so).
The big question is: can the new management team actually grow the number of Gold franchises in the short-to-medium term?
The company relies on face-to-face, teacher-led tutoring in literacy and maths, predominantly for primary and secondary school kids who have fallen behind their expected skill levels. My view is that it doesn’t matter how good the AI is; it will not fully replace a teacher. After all, AI chatbots already exist, and real attention from a real human is arguably extra important for the kids who are most likely to need the kind of extra tuition that Kip McGrath Education Centres provide.
Higher interest rates, higher fuel prices, and tight monetary policy are not good for KME’s business, because some people may need to make cuts to the family budget. However, many people prioritise education where possible, and the company has shown that demand persists in tight macro environments in the past.
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Disclosure: The author of this article owns shares in KME. The editor, Claude Walker, does 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 Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
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.