Can Kip McGrath Education Centres Limited (ASX: KME) school its way to a new online business?
Kip Mcgrath provides tutoring for school-aged children through its franchisees. Before COVID-19, Kip Mcgrath had been working on building their online tutoring business and centralised education centre model.
The switch to online learning was proving more difficult than expected for Kip McGrath and the majority of its revenue still derived from fees collected through face-to-face lessons via the franchisees.
Making the switch to online learning COVID-19 quickly flipped a switch for Kip McGrath for its network and parents to fully embrace their online model. While this change was forced on the company, it’s been beneficial for them.
At the end of May, Kip McGrath released an announcement to inform investors exactly how much COVID-19 had affected the company. As expected, there had been a significant increase in online lessons delivered with face-to-face lesson numbers falling off a cliff.
The actual lesson numbers outlined by Kip Mcgrath in that announcement were 20,000 online tutoring lessons, and 2,400 face-to-face lessons delivered over one week. Pre-COVID, the figures show Kip Mcgrath delivered 36,000 face-to-face lessons weekly along with only 550 online lessons. Meaning, they have are now doing around 20x the online lessons they once were.
How COVID-19 impacted KME
While the numbers show there has been a decrease in overall lessons during the COVID period, a higher margin for online lessons has been excellent news for Kip McGrath investors. It’s uncertain how many students will stay with the online lessons once face-to-face classes resume, however, the convenience of online lessons for parents may now have been realised.
One bear argument for Kip McGrath could be that lesson numbers stay at depressed levels for some time while the economy deals with the current climate. Parents may also have less disposable income to spend on activities such as their child’s tutoring.
Is KME a buy?
KME raised $5.9 million of capital in June to accelerate the growth of its online platform, and they cancelled the dividend payment of 1.5 cents per share. The company is not short on cash and plans on spending it to grow its online business, which I believe will provide higher returns for investors in time.
Although their online business is booming, Kip McGrath still needs to manage the change appropriately with its franchisees. Transitioning business models is no easy feat for a company, and the management team will need to play their cards right. If they do pull it off, investors in the company will be happy over the long term.
