Thursday, September 21, 2006

Kip McGrath Education Centres Limited

Kip McGrath Education Centres Limited (ASX:KME) focuses on the provision of supplementary education to students. It does this through franchising a proprietary tutoring system to owners of Franchised Centres.

Tutoring is still a major area that parents are willing to spend money and this bodes well for KME. Parents still feel a college eduation is paramount to a successful life. The directors report that the number of franchisees and the group revenues have continued to grow, generating a NPAT of $1.059M and EPS of 6.2 cents per share.

One major thing to note abour the companies main revenue source is that the franchisee fees from existing franchisees around the world increased from $2.122M to $2.557M which reflects
the growth in franchisee numbers from 590 to 663 for the year. This is an increase of 20% for the major income source of the company and reflects the fact that franchise fees are a set fee, like an annuity, and rise with CPI every year. The revenue is not affected by a recession or a downturn in franchisee revenue.

Also lets look at the following statement regarding franchise fees :
Further growth from current franchise fees is expected as franchisees do not pay the maximum fee until the third year of operation. The significant uplift in fee income that occurs in the third year of operation will be of particular importance for the UK operations, where centre numbers three years ago were only 43 compared to 243 today.

This all points to future profit and a large one at that.

Another thing to note is that the business is still run by those that started it ( the McGrath family). This usually means the owners treat the business with care and are always wanting to see it grow. They know what has worked in the past and what might work in the future.

This company is creating record profits and no one is buying the stock. It should move from here much higher in the longer term as profits increase and earnings skyrocket.

I do think the current price is a bit high as there are a few risks associated with the company and I would look to buy in around 60c if possible.

This is based on the PE and PEG ratio being at a good level. The dividend yeild is high enough at the current price. but it will most likely drop in the next few payments as they are aiming at a payout ratio of 80% and they have paid 120% and 93%.

Good Luck.

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