Why it might just pay to educate yourself on this ‘misunderstood' sector

One of the main reservations that potential investors have about Kip McGrath Education Centres is based on a misunderstanding and shouldn’t even be a reservation, says portfolio manager Luke Winchester.

The ASX-listed company’s core business is private tutoring services focused on remediation – in other words, catching up students who are falling behind in their learning.

“When I talk about Kip McGrath, one of the main reservations people have is the competition from university students and ad hoc tutors jumping onto Facebook (and parents finding a tutor for their child that way),” the Merewether Capital Founder and CIO said during his appearance on Meet the Fund Manager in June.

(Watch the full The Insider: Meet the Fund Manager session.)

“This view misunderstands exactly where Kip McGrath targets themselves. These guys focus on remediation learning, whereas most ad hoc tutoring is exam preparation – you’ve got a child about to take an exam and you want to train them up just for that particular exam – and that is a very crowded space.”

It hasn’t all been smooth sailing for Kip McGrath, though, with the COVID-19 pandemic lockdowns heavily disrupting its face-to-face centres.

The company weathered the storm well, noted Mr Winchester, saying it has been “recovering strongly” and had also been able to quickly pivot during these closures into adding an online offering, which the portfolio manager said had experienced strong uptake.

Another development for the education centres business, the CIO said, is its decision to buy back a number of its franchise stores and roll out more corporate stores.

“The main reason for this is they saw a few of their franchisees were much more successful than others, and after looking at them and understanding why, they’ve now come back and said, ‘We can replicate what was working for those more successful franchisees and apply that at a corporate level’.

“And in doing so, capture more of the profit pool for themselves.”

The rollout includes an expansion to the US through the acquisition of Tutorfly – a deal that was announced in September 2021.

“If Kip McGrath can really get some traction in the US, that would be very impressive. They’re doing it in a very thoughtful, capital light way,” Mr Winchester said.

“They’re not just going over there and spending a few million dollars on trying to build out some centres. They’re growing with government contracts. So as they win a government contract, over in Arizona primarily, they’ll grow their US business.

“I think (their recent) profits are quite muted – first-half profit of about a million dollars. This is a business that I think can do $4-5 million in profit in the next year or two. And then that multiple starts to look very reasonable.”

Click here to view more videos from Luke Winchester’s Meet the Fund Manager session.

Reach does not assume responsibility for the accuracy or completeness of any information provided, and the views expressed are not reflective of Reach Markets’ position. Any advice contained within this presentation is general advice and does not consider your personal circumstances, you should consider whether it is appropriate for you. 

The information we are giving you is for educational purposes only. “Investing is about understanding your risk” and every time you invest in the share market there is a risk of loss.

Past performance is not a reliable indicator of future performance.