Kip McGrath Education Centres Limited (KME: ASX) has been a long-standing microcap on the ASX. The company provides private tuition for students through a network of franchise tutors. The company has been overhauling its business model and systems in the last few years in order to improve profitability and capture new revenue streams. There was also a misjudged and costly diversification strategy into higher education which has since been cleaned out totally. However, now after returning to their knitting so to speak and focusing on the core business the fruits of their labours in recent times are now starting to become evident in KME’s results.

Best in Class Administration

The company has a policy of trying to provide all the back-office services for its franchisees in recent years. This is because they found that franchisees, where KME head office was providing these centralised shared administration services meant that the franchisees were relieved of this admin burden. Franchisees could then just focus on providing more tutorials and less time on basic admin which is good for both franchisee revenues and profits. If franchisee revenues and profits are increasing that’s good for the master franchisor KME. As it means increased franchise fees for them. The whole thing becomes a virtuous circle in time. KME currently has 560 franchise centres and 260 of these are gold partners which get all their admin done via head office. The remaining silver partners are yet to be converted but slow incremental progress is being made on that front.

Franchise Agreements Buyback

The company has slowly been buying back master franchise agreements over the recent past, New Zealand and Victoria being two more recent examples. Once these are bought back this means they no longer have to share the franchise fees with the relevant regional master franchisor. The recent acquisitions have cost $1.7m and will drain cash from the balance sheet but it should lead to an additional NPAT of $325k in FY19 or in other words a near 20% return on investment according to KME. The company has little or no debt and cash conversion from EBITDA is generally excellent so I am not too concerned about a cash squeeze or impacts on dividend payments. KME pays a small unfranked dividend but it should be noted not many companies with a market cap of $25mil can even manage that. KME has also guided that franked dividends may be paid in the near future, should this happen the yield will look a little more attractive.

IT investments

KME has completely overhauled its student tutoring software and its new software iKip is now up and running in 80% of franchise centres. The remaining 20% will be brought online in the next 6 months following the relevant training and the old software will then be decommissioned. Initial feedback has been very positive from franchisees. This project represents the culmination of 7 years’ worth of feedback from their franchise network and associated software development so represents a major milestone for the company.

The student booking system and the website has seen a major overhaul and the new version is much improved. The system is currently only live in Australia but will be rolled out globally in the first half of calendar 2018. This should help connect students and tutors much more easily moving forward.

Onscreen/Online Tutoring is an IT project similar to iKip that has been a long time in the making, approximately 4 years and with a few false starts thrown in along the way. The company now looks to have finally cracked the development of this platform and are now delivering 1,500 lessons a month over the platform as of Dec 2017. This is up by over 500 a month from the June 2017 full year result. The platform critically is fully integrated into iKip and allows for a smooth transition from face to face tuition to online-only tuition and the reverse if students chose to do so. The onscreen/online tutoring system is also only starting to roll out in Australia with 50 more franchise centres to be brought online in the next couple of months. Following the completion of the Australian rollout, KME will move to their next two biggest markets The UK and New Zealand. The onscreen/online tutoring platform is very pro-franchisee as it gives them another string to their bow in terms of the service they can offer to students. Crucially, it allows them to grow their business and improve profitability.

Report Card

KME may have blotted their copybook in the past with some misjudged behaviour but appear to have learned from their mistakes. If we were to give them a report card we could note, trying hard and their marks are starting to reflect this. Possible A grade student if they keep up the hard work. Should KME stay focussed and successfully complete the rollout of all the various projects they have going on, then I think it looks interesting.