Education Development International EDD
March 14, 2010 - 5:37am EST by
duff234
2010 2011
Price: 127.50 EPS $10.60 $12.90
Shares Out. (in M): 53 P/E 12.0x 9.9x
Market Cap (in $M): 68 P/FCF 10.2x 8.0x
Net Debt (in $M): -10 EBIT 8 9
TEV ($): 59 TEV/EBIT 7.3x 6.3x

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Description

 

Education Development International Plc (EDD) is a small-cap, AIM listed, for-profit education company based in the U.K. The for-profit education industry is under a cloud in the U.S. for a number of valid reasons, and there have been one or two short recommendations on VIC in the North American education industry in recent years.  

However, education outside of the U.S. is a very different industry, and EDD, although small, is a gem of a company trading at a very reasonable valuation given its ability to generate free cash flow while it grows. 

First, EDD should not be confused with a traditional education company such as Apollo or Strayer. In fact, there aren't any really good publicly traded comps in the U.S. EDD does not provide instruction. Rather, it is akin to a licensing business with a royalty-like revenue stream: EDD is basically an assessment and exams company with government accreditation to award qualifications in a variety of academic and vocational subjects. Vocational education providers, who are EDD's customers, bear the burden of recruiting students (marketing expense), providing and maintaining facilities (rent and maintenance capex), and providing instruction. EDD earns a per-student fee ranging from GBP 25-85 for certificates/diplomas awarded by its clients (like a royalty), in addition to a school registration fee of GBP 500, and in return it must ensure quality standards at instruction centers by analyzing a statistically significant sample of exams to maintain acceptable academic outcomes. EDD also serves corporate customers such as Sainsbury's in a similar way offering exam and assessment services for training programs. 

EDD was created in its present form through the December, 2002 merger of GOAL Plc and the London Chamber of Commerce and Industry Examinations Board (LCCI, founded in 1887). Since then EDD has made a number of highly successful and accretive smaller acquisitions in the space. EDD is recognized in the U.K. by the Office of Qualifications and Exams Regulator (previously Qualification and Curriculum Authority, or QCA, which was a far better name) to award vocational qualifications in approximately 30 subject areas such as math, finance, accounting, English language, marketing, and customer service. Courses are offered at 1,400 colleges and private training providers in the U.K. (and 5,000 world-wide) to more than 140,000 students in the U.K. (250,000 world-wide).   

Its hard to imagine a business like this being privately owned (as opposed to being a government body), and for-profit. A very rough parallel in the U.S. might be something like the AMTA - the American Massage Therapy Association, which is a private non-profit organization. Schools offering degrees in massage therapy benefit from being AMTA certified because it makes their degrees more valuable on the job market. In order to become AMTA certified, schools must pay a fee to the AMTA. The AMTA doesn't provide instruction, it just monitors the quality of the schools it certifies, and collects fees. The AMTA's primary challenge is to market the benefits of AMTA certification to schools and their prospective students. Another very rough parallel might be the CFA Institute, although the investment profession has historically been much higher up the food chain than the type of trades served by  EDD (also, the CFA Institute administers its own exams). The comparison is accurate insofar as the royalty-like nature of their revenue stream is similar to that of EDD. However, EDD has not one but a bunch of programs/areas of study, and possesses the expertise and scale to acquire more, and also to grow their brands internationally by marketing to private vocational schools around the world. For example, EDD's London Chamber of Commerce and Industry Examinations Board (LCCI) qualifications are already recognized by a number of governments and professional organizations around the world, providing entry into markets where substantial barriers exist to other would-be start-ups. As of FY2009, approximately 68% of EDD's revenue is from the domestic market, with just over 21% international (mainly Asia and Europe).  

EDD is not an expensive stock on an absolute basis (sorry I couldn't get the columns to line up):

Shares:             53.4m

Price (GBP)     127.5p

Mkt Cap (GBP)          68.085

Cash                            9.5

Debt                             0

EV                               58.585

LTM Revenue (Sept 2009)       28.35

LTM EBITDA                          8.87

EV/Ebitda                               6.6x

Net Income                              6.05

EV/Net Income                    9.7x

Cash from Operations               7.89

EV/Cash from Operations       7.4x

Amortization                             (.62)

Depreciation                             (.21)

Capex                                      (.26)

Net interest income                   .03

Tax                                          (2)

FCFE                                      6.64

FCFE yield%                           9.75%

The two major risks are: EDD has enjoyed a tail-wind in the last couple of years due to the very bleak employment situation in the U.K., which has led to increased enrollments in academic institutions of all kinds, including at the vocational level. The general rule in education, which applies in North America as well, is that when the economy is bad everyone goes back to school to weather the recession. A strong economic recovery is therefore potentially a risk factor for EDD. Also, a severe budget crisis in the U.K could negatively impact enrollments since many vocational programs receive some degree of government funding. EDD does not itself receive government funding, but its clients, the vocational instruction providers, do. Even in the event of a budget crisis, job-oriented education and training programs would presumably be low on the list of expenditures to cut.

 EDD's dividend yield is 1.25%, and the company has been purchasing shares for its employee benefit trust which owns 7.4% of the shares outstanding. One would think that EDD is an attractive asset for one of the larger multi-national education companies given its strong free cash flow and not-too-demanding valuation.

Catalyst

  • On-going growth in free cash flow
  • Low valuation
  • Eventual potential for buy-out
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