UCW Ltd – Fast Growing Education Provider – Meeting Notes

Reach Markets publish the notes from our analyst meetings with company management. They should be read in conjunction with the research we’ve completed. Reach Markets endeavour to provide self-directed investors a seat at our investment meetings. We publish these notes in a conversational format to get these out as quickly as possible for your consumption.

UCW entered the education market in 2016 following a corporate restructuring and has since acquired three businesses providing vocational training and higher education. At the company’s 2018 AGM the CEO indicated that FY 2019 revenue would be between $19 million and $21 million, a 60% increase, at the mid-point, over the prior year. And this is after having achieved a 26.6% increase in revenue in FY 2018. I recently met with CEO, Adam Davis and CFO Lyndon Catzel.

Business overview

UCW is building a vertically integrated education business focussed on health and community services providing courses across the full student lifecycle; vocational training, higher education and professional development. With operating units in each segment and servicing both the international and domestic student market, the basic structural elements are in place to support this vision. Accordingly, the strategy over the next few years will be to leverage these business units by enabling students to progress through the full educational lifecycle to build and advance their careers.

The company operates two businesses; Australian Learning Group (ALG), UCW’s first acquisition, (which now also incorporates the business of UCW’s second acquisition,  4Life College) is a VET provider of courses in childcare, ageing, community services, fitness, yoga teaching and remedial massage and Ikon Institute of Australia (Ikon), which is a higher education provider of specialised community services courses such as counselling, art therapy and psychotherapy. The company also has a 25% investment in Gradability, a provider of professional year and professional development courses and internship placement services.

ALG is an accredited provider to international students with campuses in Sydney, Melbourne, Brisbane and Perth. With over 1,500 enrolments per term, this business should contribute about 70% of group revenue in FY 2019. Ikon currently has around 250 domestic higher education students around Australia.

Business case and market positioning

The education market in Australia is huge and more specifically it is our third largest export industry, servicing 650,000 international students. Structurally it is highly fragmented and highly regulated. Both the government and the private sector are very active although the former dominates the university sector with the private sector more dominant in vocational training, especially for international students.

Education providers can only enrol and deliver education services to students in Australia on a student visa if they are registered on the Commonwealth Register of Institutions and Courses for Overseas Students (CRICOS). Subject to meeting a variety of criteria, providers are licenced to a maximum enrolment capacity. ALG’s current licenced capacity is for 2,700 international students per term.

The market is highly fragmented with over 500 CRICOS approved providers, most of whom are small. UCW is positioning its businesses as a premium provider in the health and community services sector. This is a fast-growing space where significant resources are required to deliver a broad range of courses.

The company’s vocational training courses are primarily targeted at international students and interestingly about 40% are from Europe and another 30% are from South America. About 90% of the company’s international students are sourced from marketing agents, who receive commission fees based on enrolments.

Business drivers and growth opportunities

UCW’s growth imperative is to build scale with the strategy to achieve this based on a combination of acquisitions and organic course development. Ideal acquisition targets are complimentary to existing operations in terms of course offerings where growth can be driven through increased investment and by leveraging its existing campus and distribution capabilities. Since its acquisition in January 2017, 4Life College has been fully integrated into ALG with a unified management team, and its enrolment base has been considerably expanded and serves as a model for future M&A activity.

The operational strategy is to expand the range of VET courses within the current health and community services focus, with nursing and related healthcare courses an obvious direction, and to expand the range of Ikon’s higher education courses to link with the current and proposed offerings in the VET space. The objective is to provide an integrated pathway for international students to further develop their qualifications which will enhance career opportunities. Ikon’s higher education course fees are considerably higher than VET courses, so integration has the potential to markedly increase revenue whilst reducing overhead costs.

Financial overview

As the major operating costs are real estate, course development and teaching, regulatory compliance and sales and marketing (agents fees), margins and profitability are driven by scale and capacity utilisation. Quick integration of acquisitions with simplified administration, campus rationalisation and course consolidation can have an early impact on margins but essentially the imperative is to boost enrolments. ALG and 4Life College international student enrolments are approaching 1,700 compared with a current CRICOS licenced capacity of 2,700 leaving plenty of scope for growth.

In FY 2018, total revenue increased by 26.6% to $12.5 million with the underlying EBITDA margin expanding from 3.3% in FY 2017 to 5.4%. The margin is low but has the potential to markedly expand, maybe to around 15% within a few years. Agents’ fees are a variable cost and take a big bite from revenue so any opportunity to source students directly will have a significant impact on margins. A pathway from the VET courses into the higher education courses for international students will be one such opportunity.

The company generated positive operating cash flow in FY 2018 and with non-committed cash resources of about $2.2 million at 30 June 2018, the company is well-funded in terms of its growth strategies. Apart from a modest amount of debt ($1.3 million) and payables, its main liability is deferred revenue which represents student fees paid in advance.

My take on the company

Education is huge in Australia and it is our third largest export industry. Clearly Australia has developed considerable competitive advantages in the delivery of education, not just to Asia but globally. Nonetheless, the industry, and particularly, the private sector is highly fragmented with a large number of small operators. Whilst barriers to entry are not especially great, there are significant barriers to scale with large costs for real estate, marketing, course development and course delivery and compliance. Accordingly, there are considerable opportunities for and potential benefits from acquiring and integrating small operators.

I like that the company is well funded and resourced to enable it to execute its business plan.

To sustain high rates of growth, this the company needs to roll-out new courses within its heath and community services focus with a view to filling the large unabsorbed enrolment gap (currently about 1,000 places). Further, with a solid funding base, the company can support some aggressive acquisition driven growth which could propel revenue above say $50 million over the next few years.

The challenge for the company will be to maintain tight controls over the integration process to ensure that quality and compliance is maintained and the expected operating benefits and organic growth are delivered.

If the company can achieve its growth objectives and significantly boost margins over the medium term, there would appear to be considerable medium to long term valuation upside.

Gordon Capital Disclaimer

This document is provided by Gordon Capital Pty Ltd (Gordon Capital) and InterPrac Financial Planning Pty Ltd (InterPrac). The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts.

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