EVO - Evolve Education

[Joshuatree]

Thanks to all for a great analysis and discussion today and on..Sharetrader at its best

[winner69]

EPS 5 cps v 4.8 Assume 10 cps for the full year, (my no growth PE is the same one Ben Grahame used 8.5), fair value 85 cps in my opinion if you believe the intangible asset valuation ?

Total Assets $210m of which $197.6m is intangible assets. (Refer to my comments in the Veritas thread for my jaundiced view of intangible assets).

Taking into account debt the net NTA is -18 cps up from -15 cps in the previous corresponding period.

Divvy yield 5% net or 6.9% gross. Disc: Don't hold.

What's wrong with intangibles in Evolves case?

After all it's what they paid for their ECE centres - without them they dont have a business

[winner69]

So future growth is what extra they can squeeze out of existing centres plus acquisition of new centres

Love this comment in recent announcements - 'Vendor price expectations are elevated'

Greedy bunch of operators aren't they - not seeing a gift horse when one appears willing to enrich them.

Hope evolve don't pay over the odds for centres

Spose this statement says they happy with the prices they paid - Average purchase price EBITDA multiple expectation up approx. 1x from those of FY16, (multiples calculated on budgeted first year under Evolve operation), to approx. 6x. (Whatever hat means)

[Beagle]

What's wrong with intangibles in Evolves case?

After all it's what they paid for their ECE centres - without them they dont have a business

With negative net assets of 18 cps and EVO looking to acquire another 20 or so early childhood centres this year using debt I think the theory behind this is worthy of discussion.
Disc: I don't know the industry well but I have no choice sometimes at family gatherings to listen to my two sister in law's chatter on about issues affecting the sector and their centre's and crikey do they know how to talk !

At a fundamental level I have an issue with the non amortisation of goodwill on acquisition when the industry can be affected both positively and negatively by government policies.
No amortisation of goodwill at all suggests the goodwill on acquisition can never be diminished and has an infinite life.
I don't believe this is appropriate with childcare centres for a number of reasons:-
1. Potential changes in future government policy. We saw tremendous growth in the industry when parents were allowed 20 hours free care per week, what if that policy changes at some stage in the future and there is grossly excessive capacity in the industry ?
2. Competition increases - lack of barriers to entry. I've seen the profitability on centres hollowed out by more upmarket centres opening in the same neighbourhood
3. Potential for mismanagement - A centre is only as good as the management. To suggest that there is no possibility whatsoever of goodwill erosion through mismanagement or management at a lesser level than the former owner, or parents being disaffected by the change to the corporatized model is a brave call.

As I suggested on the Veritas thread, goodwill on acquisition sometimes has a mysterious habit of disappearing at a faster rate than any contemplated amortisation rate. Seeing as there's no amortisation rate with EVO's intangible assets shareholders are entirely relying on management's ability to maintain goodwill indefinitely.

As Noodles pointed out recently their stat's are good thus far...but that's predicated off a rapidly expanding population base due to the highest migration level's N.Z. has ever had. Will those migration level's continue indefinitely ?
What about demographic factors, kids don't stay in these centres for long, what about if less babies are born in the future ?

From what I have observed I think this is a cyclical industry with cycles primarily driven by factors mentioned earlier. In my view at least at a theoretical level I don't feel comfortable that goodwill can be maintained indefinitely in any cyclical industry. I'm not suggesting EVO is not complying with generally accepted accounting principle's with the preparation of their financial statements but all I am suggesting is the fact that their is debate within the accounting profession as to the current accounting standards in this area and whether they are appropriate at a blanket level or for some industries in particular.

I'd feel more comfortable if the bulk of their model was starting new centres from scratch rather than paying full price when the industry aided by positive cyclical factors at present is booming.

As I said in the Veritas thread my default position when thinking about any company is to strip out intangible assets and value them at NIL and then start to ask myself if they might indeed be worth something or not i.e. I never rely on what some other accountant says they're worth.

Noodles suggested we can rely on ERO audits for quality control...I have a low level of the assurance you can gain from any auditing process. (I know its a different auditing process but all those finance companies that collapsed during the GFC were audited, see my point ?) All those finance companies were also overseen by so called professional trustees.

[winner69]

Has anybody tried to reconcile what the recently acquired centres have generated in the way of revenues and by default what the existing centres are doing

Like the 20 acquired in FY16 were reported as doing $11.0m ($19m if they were open for the full year) and the 5 acquired in H117 did $1.4m.

Question - is this purported strong growth really that strong.

[winner69]

The EVO looks a bit moribund

Seems to fluctuate around the $1 plus or minus 10 cents - in spite of 25 new centres (~$35m revenues)

Is EVO going to be one of those stocks that promises so much but at the end of the day it can't seem to excite the punters

Or other reasons not liked?

[forest]

Or other reasons not liked?

For me the fact that some of there competition are not for profit organisations is a negative. These organisations don't pay tax and therefor will put a limit of how much EVO can grow there profits.

[forest]

"It's just an impossible situation. You can't satisfy parents who want to hold fee costs, the teachers who want a raise and the shareholders that want a dividend. That's why I re privatised it. We just couldn't survive in that scenario.(Kidicorp owner)

Last years article on stuff,

The owners of the country's biggest childcare company, Kidicorp, are ditching the corporate name and giving the whole operation to charity.

Wayne and Chloe Wright, whose family trust has owned Kidicorp since privatising it in 2007, have transferred the company to the Wright Family Foundation, a new registered charity.

Wayne Wright said it was their passion to make a difference to the lives of children.

"We were very successful financially younger in life and money has never been of much interest to us. We're just interested in making a difference. There's not too many people that have that view – in fact I'm regularly surprised at the way people want to hang on to their money. We're just not like that."

The company, which runs 256 childcare centres up and down the country, has been renamed Best Start Educare. As a company wholly owned by a registered charity, Best Start will benefit from tax-exempt status.

Its services will continue to operate under current brand names, including Top Kids, ABC, First Steps and Edukids. Collectively they look after about 19,000 children and employ more than 4800 people.

Wayne Wright said although the operation would have been valuable to outside investors, "we wanted to protect the quality features and community-centric approach we've built up over the years.

"We've accepted the reality that commercially driven owners would be focused on returns to shareholders and likely compromise what Best Start stands for – improving children's lives across New Zealand."

The Wrights have previously flirted with an overtly corporate model, listing KidiCorp through a reverse takeover in 2003.

The move was not an outstanding success and the family bought Kidicorp back in 2007 in a deal valuing it about $42m.

In an interview with the Sunday Star-Times last year, Wayne Wright said the public markets were difficult for a childcare-focused business.

"It's just an impossible situation. You can't satisfy parents who want to hold fee costs, the teachers who want a raise and the shareholders that want a dividend. That's why I reprivatised it. We just couldn't survive in that scenario."

Chloe Wright said moving ownership into a charitable foundation was a natural progression.

"Profit and returns have never been a priority for us, so this seemed to be the natural and right thing to do. We wanted to make our not-for-profit structure clear and official."

The Wright Family Foundation was registered as a charity in August last year. Its officers are Wayne and Chloe Wright and Tauranga solicitor William Holland.

[percy]

The points Wayne Wright make could apply to a number of industries/sectors;
Food .Sanitarium pay no tax,yet the supermarkets are full of other companies' breakfast products.
Retirement Sector.Not for profit,and small operators are giving away to RYM,MET,SUM because compliance,health and safety issues cost them too much.
Education.In NZ private schools compete with both Church and State schools.
General.Why would you pay $150 for a pair of jeans when you can buy some for $20,a bottle of Oyster Bay wine for $20 when you can buy others for $10,pay $250 for a flight to ChCh when the person sitting next to you paid under $100?
The answer is CHOICE.
EVO gives parents the choice.
For EVO to succeed they have to do the following;Be in the right location,and offer their customers great service/safety,.If you give the customer what they want,you will get what you want,applies to any business in any sector.
EVO have a good business model which is working.So they are giving their customers what they want.
The revenue is growing,both by occupancy rates and number of sites.They have the choice of starting their own new premises, or buying existing businesses.The business is on track.
The eps is growing,
The dividend is growing.
The sector is growing.
They have the finnancial capacity to expand the business without coming back to shareholders for more capital.

[Beagle]

Thanks Forest, interesting article. Sounds like the sort of centre I'd like my grandchildren to attend. Putting kids before profit. The whole deal, making money from a corporatized model from very young children makes me uncomfortable but each to their own.