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Student Housing Business Trading At Significant Discount To NTA And Future Growth Prospects

|Includes: CIBT Education Group, Inc. (MBAIF)

INVESTMENT HIGHLIGHTS

  • Education management company at front of significant shift in student housing in metro Vancouver.
  • Targeting a $1bn student housing portfolio within 5 years, with $250m almost completed.
  • Strategic educational assets that give company a competitive advantage in sourcing and distribution.
  • Currently priced for failure, trading at $0.30 per share (implying business value of approx $20m).
  • Conservatively valuation with significant margins of safety supports $0.87 to $1.17 per share (or $52m - $77m in total equity value).

SUMMARY

CIBT Education Group Inc (CIBT) is an education management company founded in 1994 and trades on the Toronto Stock Exchange. The financial accounts are prepared in accordance with International Financial Reporting Standards (last report for May 31st 2015) and the following analysis uses the Canadian Dollar as standard (1.00 USD = CAD 1.33). I own a long position in this company.

The business is trading at a significant discount to its intrinsic value based on the value of the current business (Education Assets) and secondly based on the future growth rates of the business' free cash flow (Student Housing).

At the current share price of $0.30, the business is trading at a market capitalisation of $21m, and an enterprise value of $17m. This excludes the book value of the company's interest in investment properties (of $33m) and the long term debt secured by these investments ($23m).

The share price has traded around $0.30 per share for the past 18 months. We believe investors will be well rewarded from the quiet compounding of underlying business value over this period.

Our conservative valuation of the business with significant margins of safety on each segment supports an equity value of $0.81 - $1.17 per share (or $52m - $77m in total).

BUSINESS BACKGROUND

CIBT's core vision is to have management and equity interests in $1 billion of student housing real estate in 5 years (which will equate to approximately 5,000 student beds), and $250 million of this is close to finalized.

There are three parts of the CIBT business which investors should understand:

  • Education assets: management and vacation schools in Canada (valued at $24m)
  • Student network business: international student referral and related services (valued at $3m)
  • Student housing: equity and management rights in multiple projects (valued at $25m - $50m)

This submission will focus on our special insights. Detailed descriptions of the business model are available here and the corporate video is available here.

WHY IS THE BUSINESS UNDERVALUED

The market sees CIBT as a loss-making student education business, while it is actually an education focused property developer at the front of a significant shift in student housing in metro Vancouver, with strategic education assets and an international student referral business giving it a strong competitive advantage to competing student housing developments.

We believe the market is focusing on four transitory issues in the business which are misunderstood. These are:

  • Issues with education: the private education sector as a whole has been coming under pressure in recent years due to governments pushing for higher quality programs (Apollo, Corinthian etc.). CIBT's education assets have increased enrolments over this period
  • Lack of profitability: the business currently breaks even on a consolidated basis, however the education assets have strong underlying value and would be profitable as a stand-alone business
  • Complicated capital structure: there is a lack of clear visibility on the value of housing projects, with minority interests and non-recurring items in the financial accounts, and loose ties to China
  • Seeming strategy divergence: formerly a dedicated education business, the strategy changed in 2012 to student housing, with execution of the new strategy being priced for failure

We think the market is missing the value of the global student network that will channel students into the housing developments. CIBT is targeting management and equity interests in $1 billion of student housing real estate in 5 years, and they currently have $250 million fully lined up at financing stage.

Importantly, CIBT has 20 year management rights on the projects and is paid sweat equity for structuring the projects and channelling students in the housing developments. The current market cap of CIBT barely values it at the value of its education assets, and attributes nothing to its student housing developments.

THE BUSINESS

Overview

The information summary here contains a background of the business. CIBT had been running educational businesses since 1994, and in 2012 changed strategy to focus on student housing in Vancouver - and has made significant headway.

On a consolidated level, the business is largely break-even with student housing revenues only starting to come online in the last quarter. The business generates about $30m in revenue, $10m of gross margin and is break-even at an EBITDA level (excluding non-recurring development income and property revaluations).

The enterprise valuation at $0.30 per share is $17m, with the key multiples being:

· Book equity value = 0.7x

· EV / Revenue = 0.5x

· EV / Adj EBITDA = 3.6x (based on education assets earning a normalised 15% EBITDA margin, and excluding all development and rental income)

The industry

Each of CIBT's businesses are highly leveraged to the Canadian education and student housing market. The Canadian government is ramping up to become one of the top 5 largest destination countries in the world for foreign students behind the US and the UK.

According to a Federal government news release (available here), the quota of international students allowed admission into Canada is expected to climb 88% in 10 years, from 240,000 in 2012 to 450,000 by 2022. Out of this large market, Metro Vancouver is expected to continue to have one of the largest market shares in Canada.

Education Assets

CIBT's network of business, technical and language colleges in North America and Asia include:

  • Sprott Shaw College: a group of 13 career colleges in Canada, acquired in 2007 for $12 million
  • Acsenda School of Management: a degree granting institution in Vancouver, British Columbia
  • CIBT School of Business: a group of accredited management schools and ESL schools in China

These businesses generate the significant portion of CIBT's current revenue and are largely break-even on an EBITDA basis. We understand that CIBT has received offers for Sprott Shaw college at $30m, which have been refused due to strategic reasons. The college is one of the oldest educational institutions in Canada (107 years old).

At a valuation of $30m, the Education Assets would be valued at approximately 6x EBITDA assuming the current $30m of revenue and a normalised 15% EBITDA margin.

Using a 20% margin of safety, we value the Education Assets at $24m and believe there would be a strong appetite from the private market if the business were for sale.

Student network business

CIBT student network business is called Global Education Alliance (GEA), and it recruits international students for many elite kindergarten, primary, secondary schools and universities in North America. Through GEA's recruitment agreements with over 100 educational institutions, CIBT has access to over 20,000 foreign students.

GEA does about $1m of revenue per year, at a 60% margin = $600k for gross profit.

The key differentiator here is the level of access CIBT has with the students. Student housing developers have significant limitations in finding student flow (see CHC Student Housing here). With CIBT's student reach and metro Vancouver housing vacancy at 0.5% - this will be a significant advantage for partners in the student housing business.

Given the synergistic nature with CIBT's other businesses, we value the division at $3m.

Student housing

CIBT's student housing business is called Global Education Holdings (NYSE:GEC), which is an investment holding and management company with a special focus on education-related real estate projects in Canada.

CIBT is targeting management and equity interests in $1 billion of student housing real estate in 5 years. With high capital requirements for housing developments, CIBT is paid sweat equity for structuring the projects and channelling students in the housing development operations, in addition to obtaining 20 year management rights on the projects. We understand that GEC will take 10% - 30% equity in each of the 9 student housing projects.

The company has so far signed agreements with several property developers and is aiming to have most projects fully leased and revenue realized prior to renovation or construction completion. They currently have a total of $250 million fully lined up at financing stage.

Few developers are undertaking student housing projects as they lack control of student flow, which is the key reason CIBT is perfectly positioned to execute. Furthermore, the Vancouver rental market extremely tight (sub 0.5% vacancy) and students have trouble finding accommodation (search Vancouver vacancy in google, UBC has ~6,300 people on waiting list for housing).

CASE STUDY OF STUDENT HOUSING

A case study of one of CIBT's housing investments helps display the underlying value. Importantly, this case study is based on only one of the nine student housing projects underway.

In January 2015, CIBT announced that it had acquired Viva Suites (video here). Total project value including purchase price and renovation cost is approximately $37 million (valuation signed mid-2014, with Vancouver real estate up about 20% since this time). Post renovation (six months), the building will accommodate up to 230 student beds (which fetch an average of $12,000 per annum).

· $230 beds x $12,000 = $2.8m rental revenue

· Assuming a 5% gross yield = the building value would be $55m ($2.8m / 5%)

· There is ~$25m of debt tied to the building = equity value of $30m

Viva suites is owned by GEC LP 3, which CIBT owns 20% of the equity (through GEC Holdings). A 20% CIBT interest x $30m equity value = $6m of equity value for CIBT in the building (30% of current market cap).

CIBT also has 20 year management rights on the building. If the equity in this deal alone is worth $6m (excluding management rights) for CIBT, we expect the value of the other 9 projects to be significantly lucrative.

STUDENT HOUSING VALUATION

CIBT is aiming for $1bn of student housing in five years, with 20 year management rights and obtaining equity between 10% - 30% of each project. If this were achieved with perfect execution, the business would:

  • Manage $1bn of high yield real estate: 5,000 beds yielding $12,000 each equals $60m of rental revenue, assuming a standard 5% management fee equals $3m of fees
  • Own 10% - 30% of the equity of the projects: assuming all the property is funded with 80% debt = $200m of equity value. CIBT's interest would be anywhere between $20m to $60m

It would be reasonable to expect a business at this point would be safely valued at somewhere between $50m - $100m. Importantly, CIBT is 25% of the way to this outcome, with $250m of the housing projects close to finalized.

Using a 50% discount for a margin of safety for execution, timing and financing risk, we value the student housing business at $25m - $50m.

THE MANAGEMENT TEAM

Toby Chu is the founder and CEO of the business, and owns about 15% of the company, with other insiders holding an additional 35%, and the remaining 50% being free float.

He is very accessible as a CEO and welcomes investor interest. There was heavy insider buying from March to June this year (see source here) around $0.25 per share.

THE CATALYSTS

There are four key events that we believe will see the market recognize the value discrepancy in CIBT:

· Continued momentum in the student housing projects through project announcements and development fees

o $1 billion of student housing real estate in 5 years and $250 million fully lined up at financing stage.

o Further announcements are expected in short and medium term

· Liquidity events in student housing demand (several pension funds investing heavily)

o The investment market for student housing has been gathering significant momentum (see article here), with CPPIB buying up projects in United Kingdom (article here)

· Realization of value through selective asset sales

o CIBT's Education Assets are not being correctly valued by the market, selective sales could see cash returned to company

· Increased institutional awareness and understanding of the investment story

o Trading activity and investor awareness of the story is virtually non-existent, and we expect liquidity to return as more investors learn about the story

o The company announced a non-brokered private placement raising $1.2m in July 2015

o In June 2015, CIBT took out the two major overhanging selling shareholders (an institutional shareholder that got consolidated and an estate block from a deceased owner)

RISKS

There are two major risks for CIBT:

· Financing

o CIBT relies on its relationships with institutional investors for the capital in its projects, and earns 'sweat equity' through structuring the project

o If there was a lack of investor demand for student housing exposure, CIBT's ambition could be difficult

· Regulation

o In recent years there has been a significant restructure of 'for-profit' education providers (as seen with Corinthian Colleges in the United States)

o Governments are increasingly focused on ensuring appropriate education standards and job placement representation

o This can limit the total available student market for private education providers, and also student housing

At current prices, we believe that the investment downside is minimal and that the risk is skewed asymmetrically to the upside.

CIBT has a clear path to a significant re-rating in the short term, and the business is currently priced for complete failure in its ambitions for a $1bn student housing portfolio (even though it is 25% of the way there).

ADDITIONAL INFORMATION

CIBT Introduces New Corporate Video and Business Updates -http://www.sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00005932&fileName=/csfsprod/data151/filings/02374085/00000001/C%3A%5CSEDARfilings%5CCIBTPRJuly212015EG.pdf

Student housing limited at UBC -http://www.cbc.ca/news/canada/british-columbia/ubc-student-housing-vancouver-rental-shortage-has-students-scrambling-1.2740257

UBC - university now has a wait-list of roughly 5,000 students, all waiting for campus housing. He says there may be a vacancy problem in Vancouver.

UBC has 12,000 international students -https://www.ubc.ca/_assets/pdf/UBC_Overview_Facts_2014-15_Web.pdf

http://www.vancouversun.com/Students+struggle+find+accommodation+Vancouver+rental+market/10135359/story.html?__lsa=76db-11d8

Student housing research - http://www.cmhc-schl.gc.ca/odpub/esub/64467/64467_2014_A01.pdf

CIBT Featured on CKNW Radio - The Lynda Steele Show -http://cibt.net/news/20150903.php

Fees at UBC - http://vancouver.housing.ubc.ca/getting-started/prospective/

Disclosure: I am/we are long CIBT.