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NORD - Organic Growth And Visibility Of Revenue

|Includes: Nord Anglia Education Inc. (NORD)

Basic Information

Company name: Nord Anglia Education (NAE)

Ticker: NORD

Price: $17.38 (Feb.4 2016)

52-week range: $14.48-$27.18

Market cap: $1.8B

Recommendation: Buy (PT $22.54 at end of 2016)

Overview:

Nord Anglia Education operates one of the largest premium international school network, targeting geographic markets with high FDI and large expatriate population. With 63% of the students are expatriates, It now teaches over 34,750 students from kindergarten through the end of secondary school (K-12), covering 15 countries with 42 schools. As leader in this highly fragmented market, their business model is featured with revenue visibility, price inelasticity, low capital requirements and strong cash generation.

Competitive advantages:

1) Significant economies of scale in terms of curriculum development, brand building, marketing and administration as one of the largest network of private schools operating under a similar curriculum.

2) High academic quality evidenced by 1/3 of graduates matriculated to one of world's top 100 university and 1/5 to world's top 30 university, which supports premium pricing and drives consistent enrollment growth.

3) Unique expanding model allows to grow its schools in a capital efficient manner with real developers or former school owners owning the associated real estate. NAE's investment is typically a small amount equivalent to around one year of tuition.

Catalysts:

1) New greenfield school in Shanghai (2,250 seats) and Houston (2,200 seats) to open in Sep.2016, and new school in Abu Dhabi (2,250 seats) in Sep.2017. The new campus in Shanghai will cater to children of PRC nationals, and it is NAE's first bilingual school in China, before which it only receives children of foreign nationals.

2) A rising trends of expatriate demand for quality education.

3) Deleveraging lowers interest costs and allows the company to expand faster.

Risks:

1) Slowdown of global economy, which may lower companies' commitments to global expansion, which could impact the number of expats across the market.

2) Competition in the premium school market could reduce enrollments, increase cost of recruiting and retaining students and teachers and put downward pressure on tuition fees and profitability.

3) Exchange rate fluctuations may adversely affect results of operations and profitability.

EPS:

PE: 25.7x

EV/EBITDA: 20.61x

Revenue:

Note: Favorable working capital dynamics ensures visibility of revenue, in FY16 Q1 revenue is 244M, comparing to 154M same period (Approximately 51% of FY revenue received before beginning of fiscal year)

Notes:

China has 5,744 FTEs (Full time equivalent), revenue/FTE $9.6k down from $10.2k, capacity up 15.1% and utilization is 64%.

US has 9,436 FTEs, revenue/FTE $7.0k down from $7.6k, capacity up 259.2% and utilization is 70%.

EU has 6,472 FTEs, revenue/FTE $9,7k up from $8.6k, capacity up 41.6% and utilization is 75%.

MEA has 5,282 FTEs, revenue/FTE $4.8k up from 4.6k, capacity up 11.4% and utilization is 90%.

SEA has 7,321 FTEs, revenue/FTE $4.5k down from 5.0k, capacity up 323.80% and utilization is 61%.

Capital Structure:

Debt/Equity: 381.8%

Net Debt/Equity: 308%

DCF Valuation

Notes:

Assumed lower revenue growth due to lower pace of acquisition of new schools after FY16.

The company does not have a track record of recurrent dividends and need cash for new acquisitions or debt repayment.

Supporting Documents

  1. NORD_stock_pitch_Jingwei_Wu.docx

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.