Sector financial performance:

This company, who primarily provides career-oriented educational services including medical& healthcare, accounting, and technology and business, has been grouped into career-oriented educational services sector in education industry.

It seems that demand for regular postsecondary education that companies in this sector provides has decreased significantly in the past three years as indicated by decreased enrollment. The demand for career-oriented education service such as medical& healthcare and accounting, which are the major focus of these companies, had been flat between 2015 and 2017 but increased in 2018. Spinning off of postsecondary education business activities increased.

This is a high margin sector (a typical gross margin and operating margin was 46% and 12%). However, what we have been seeing is that as the growth in enrollment slowed down for their postsecondary schools companies had experienced increasing pressure on their margins and have to cutting their spending on SG&A to keep margin high. Without the postsecondary schools, the gross margin was improved to about 48% and operating margin was improved to about 17%.

According to our analysis, the current companies’ enterprise price/EBI ratio is around 22 with an interest/EBITDA ratio of 5%.

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Company performance:

Demand for this company’s postsecondary education service had decreased significantly between 2015 and 2017 as indicated by the decrease in enrollment and revenues, which was down about 20% in 2017 and 2016. Demand for its medical and healthcare education and thus revenue seemed to be fluctuated in a small range during the same period. Demand for its accounting, technology and business seemed to be increasing mildly during the same period. In 2017/18, company signed and will spin off its two underperformed traditional schools. And we also see continuing trend in growth in its oriented –profession education program including medical and professional program.

Fiscal 2018 compared with 2017

Net organic sales (excluding two traditional postsecondary education businesses, held for sale) increased about 3% primarily due to increase in accounting professional education and from medical education.

The first three months of fiscal 2018 compared with the same period of 2017 

Net organic sales decreased about 5% primarily due to decrease of 19% in traditional postsecondary education offset by increase in revenue from accounting professional education. Revenue from medical was flat.

Fiscal 2017 compared with 2016

Net organic sales decreased about 8% primarily due to decrease of 21% in traditional postsecondary education and decrease of 10% in accounting professional education offset by increase of 2-3% in revenue from medical and healthcare and technology and business.

Fiscal 2016 compared with 2015

Net organic sales decreased about 1.2% primarily due to decrease of 23% in technology and business education as a result of decrease in enrollment offset by increase in medical and accounting professional education.

Due to less operating leverage as a result of expansion of school campus and abnormal weather condition, this company’s gross margin was down by 150 basis points to about 46% between 2015 and 2017. During the same time, the SG&A as percentage of sales and technology expense as percentage of sales decreased by about 300 basis points as a result of efficient costs reduction. Its operating margin actually went up to 12% in 2017 (based on 12 months trailing data). In 2017/18, its gross margin was improved to about 48% and with the largely continuously improved SG&A% (30%) due to excluding held on sales business, we see a large improvement in operating margin (about 17%). While organic revenue and earnings were both improved in 2018 when excluding two held on sale schools, the actual earnings decreased when comparing spinning off of two schools before and after due to mix impact in decreasing revenue and costs.

Stock price

This stock currently has a companies’ enterprise price/EBI ratio of 22 ($45). We assume that the held for sale asset valued insignificantly. We think that its stock is being relatively overvalued considering the growth in its cash flow while its leading position and reputation in professional education training service industry and favourable economy and job market environment.