If any sector is ripe for disruption, it’s education. The industry has exceptional long-term prospects, yet many education providers are conservative and slow-moving.
The global education industry will be worth US$10 trillion by 2030, from about US$6 trillion today, estimates education data provider Holon IQ. More than a billion extra students will graduate by then as developing economies in Asia and Africa drive demand.
The world will need 100 million teachers by 2030 or an extra 1.5 million on average each year. Then there’s the boom in early-learning education, after-school tutoring, vocational education and training, online learning, and education compliance and administration.
In the Gig Economy, expect more people to move between work and education as projects start and finish. And companies to push universities to provide micro-credentials and just-in-time learning, in addition to multi-year degrees, and for more of it to be offered online at lower cost.
Most universities are responding to these trends, but it’s remarkable how many still rely on 12-week semesters, face-to-face learning and traditional course structures. There hasn’t been enough innovation in education, although some providers are working hard to change that.
The education sector has traits that make it vulnerable to disruption: a high fixed-cost base to develop and maintain buildings; a large administrative staff to organise courses and students, and report on it for compliance; a highly unionised workforce that sometimes resists change; and a conservative, risk-averse mindset among too many university leaders.
For all these challenges, many Australian universities have gone from strength to strength. International student numbers have boomed and domestic enrolments have grown. Few private-sector tertiary providers have challenged incumbent providers.
Education is a great business when it works: the same content, when delivered online, can be scaled to a large audience at low marginal cost; there are high switching costs to change education providers; and recurring income as students take more courses to finish their degree.
I lectured at university for 10 years in innovation and entrepreneurship. My course had almost 400 students, each paying about $1,200 for 12 weeks of instruction. That’s $480,000 in revenue for a single course (pity I earned 2% of that!). Were it not for a bloated university bureaucracy, the profit margin on such a course would have been exceptional.
Given these trends, one would expect ASX to have a flourishing “EdTech” sector as start-ups and software companies disrupt the sector. Not so. Unlike the United States, ASX has never had a sizeable listed education sector. Apart from the handful of firms, most education stocks are small and there have been disasters in vocational education along the way.
Some start-ups underestimate how hard it is to break into Australia’s education sector. I did. My first start-up involved selling marketing leads for international students directly to universities, so they could bypass agents (and their fees). Most universities we met said it was a great idea and some signed on as customers.
But it took six months to get a meeting with some universities and another six months before decisions were made. It took much longer than we thought to sell to the sector, so a good idea was abandoned. The timing of cashflow is everything.
Although choice is limited, I’ve mostly had a good run with education stocks for The Switzer Report. I have been a long-term supporter of IDP Education (IEL) (its average annual total return over three years is 54%) and identified Navitas for readers, just before its takeover.
I’ve also written favourably about education property owners ARENA REIT (ARF) and Charter Hall Education Trust (CQE). Both have done well. Another favoured education stock, 3P Learning (3PL), has disappointed and I was caught years ago on New Zealand provider Intueri Education.
I’ve been reading up lately on smaller providers, many involved in software of vocational technology. They include: training organisations iCollege and RedHill Education; compliance learning and assessment provider Janison Education Group; online games-based learning provider Kneomedia; digital e-learning provider ReadCloud; industry trainer Site Group International; software provider ReadyTech Holdings; and cybersecurity provider, Family Zone Cyber Safety.
Of those, I favour the compliance technology stocks, Janison Education Group (JAN) and ReadyTech Holdings (RDY), which listed on ASX earlier this year through an Initial Public Offering. ReadyTech, in particular, has interesting prospects and looks like one of the better recent IPOs.
Family Zone (FZO) also looks interesting after recent price falls; I’ll consider it a later column.
1. Janison Education Group (JAN)
Janison provides digital learning and assessment solutions – a growing market if ever this is one, as more education is provided online.
The Janison Learning division sells customised online learning platforms for companies and helps them manage compliance obligations around training. The Janison Insights business helps organisations centralise, streamline and digitise assessments. Some of Australia’s largest State government departments and companies use Janison products.
Like other software-as-a-service (SaaS) companies, Janison has a licensing model. Annualised recurring revenue has grown from $8.1 million in 2016 to $12 million in 2019. Client numbers grew 60% over FY19.
Janison had a 40% margin in FY19 on revenue and customer retention was 97.5%. Education software is not an easy market to crack, but when big customers implement the technology, they tend to stick with it for years, paying annual licence fees. As the business scales, the marginal cost of serving extra customers online is low, boosting margins and profits.
Unlike many micro-cap tech stocks, Janison is profitable (underlying earnings were $3.3 million FY19). Capitalised at $49 million, Janison’s EBITDA multiple is about 14 times and the group revenue multiple is a touch over two times. That’s not excessive given the opportunity.
Like many micro-caps, Janison has a relatively low profile and its stock is thinly traded. Founders and directors own 54% of its equity. The business had $6 million in cash in FY19 and plenty of large clients (customer concentration is a declining risk as it expands the client base).
The company made solid progress in FY19, yet its stock has fallen from a 52-week high of 47 cents to 28 cents. Investors clearly want to see faster revenue growth.
Janison suits experienced investors who understand the risks of micro-cap stocks. If you believe companies will offer more training online in coming years – and require digital compliance and assessment services, Janison is worth a spot on portfolio watchlists.
Chart 1: Janison Education Group
Source: ASX
2. ReadyTech Holdings (RDY)
ReadyTech was one of the few IPOs from earlier this year. The education technology stock joined ASX in April through a $50-million float. ReadyTech’s shares, offered at $1.51, have rallied to $1.70, having gone as high as $2.15.
I like ReadyTech’s prospects. Like Janison, it is a SaaS provider. Founded in 1998, ReadyTech helps customers comply with regulatory and legislative reporting obligations, manage large numbers of students during their course, and manage payrolls.
Several universities and TAFEs use ReadyTech software and the business is targeting more corporates that want to use its payroll and human resources administration products.
It’s a massive growth market. The coming boom in student numbers inevitably means greater administration and compliance – and rising demand for software that meets this need. It should mean recurring, visible revenue for ReadyTech, with high margins and retention rates.
ReadyTech’s maiden result as a listed company marginally beat its prospectus forecast for underlying earnings (EBITDA) by in FY19. The company said it had record new business in that period with more than 400 client wins and was attracting new and higher-value clients. That suggests a strong pipeline of future revenue opportunities and some decent earnings tailwinds.
Macquarie Group, a joint lead manager to the ReadyTech float, believes there is a significant re-rating opportunity if the company wins extra tertiary contracts. Macquarie says ReadyTech’s contract win with University of Queensland could be a reference point to value future contracts and a catalyst to increase the sales pipeline.
Macquarie’s 12-month price target of $2.20 implies a sufficient margin of safety from the current $1.74. Care is always needed when a sponsoring broker has a bullish view on a “house stock”, but Macquarie’s price target seems reasonable given ReadyTech’s momentum and prospects.
Like Janison, ReadyTech suits experienced investors who can tolerate higher risks with micro-caps and newly listed companies. I usually prefer to buy micro-cap IPOs a year or two after they list (and the escrow period expires) and when they have more history as a listed entity.
I’ll make an exception with ReadyTech given the education sector’s outlook and rising demand for mission-critical administration and compliance software as student numbers expand.
Chart 2: ReadyTech Holdings
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 28 August 2019.
