Thanks for the feedback to my last post of 2nd June, and in particular for the 4 GA's. As I now know that there are some followers listening, I thought I would share my recent deep dive on the ICAS acquisition of June 2020:
EducationalAssessments / ICAS Acquisition – June 2020
Followingare my reasons for believing that JAN’s June 2020 acquisition of EducationalAssessments / ICAS (later renamed ICAS Assessments) from UNSW Global is verymuch better than most investors would have believed at the time and is hugelybeneficial for JAN now and even more so in coming years.
Based on myconservative EBITDA projection for EA/ICAS in FY22 of $4.0M (see my spreadsheetbelow), IMO EA is already worth at least 6 times forward EBITDA at $24M. Due tothe very high margins, a recovery in assessments income could easily doubleEBITDA to $8.0M in FY23 and a value of $48M. This is in the context of the total current market cap for JAN of $182M.
Note that JAN only paid $0.75M for EA. IMO, there is avery substantial growth runway for EA’s EBITDA as assessment platform revenuerecovers to pre-Covid levels of $15M, and then rises further as JAN achievessome cross selling of EA’s services to previous JAN customers.
It is clearthat UNSW Global wanted to get rid of its EA business which made an EBITDA lossof $1.7M in FY19 and only break-even EBITDA for the four years prior to FY19.EA had experienced a major loss of customers following significant adverseimpacts in transitioning from paper to on-line digital exams for ICAS in 2019,and in early 2020 was facing further major uncertainties with the advent ofCovid 19.
Whatexactly did JAN acquire for a total cost of only $0.7M?:
·Approx $10M of high-quality,high-margin recurring platform revenue in CY2019 (prior to the temporary CY2020issues when revenue dropped by more than half). On recovery, $15M ARR asachieved in CY2016 is expected to be achieved once again.
·A highly experienced management teamplus the skillset of EA’s team of psychometricians, statisticians, and examauthoring and reporting experts (32 staff).
·A client base of approx 7,000schools, including 50% of all Australian domestic schools, plus internationalpartners.
·A deep library of educational IP,including more than 20,000 digital test questions, that can be globallymonetised.
·An internationally recognised brandwith a range of products including: EA’s flagship formative assessment productICAS (a recognised international elite skills-based competition which has runfor 30 years in 15 countries including Australia, New Zealand, Singapore,Malaysia, Indonesia, Greater China, South Africa and India); JET, acurriculum-linked assessment; and REACH, a multi-layered reporting platform forschools. Over the past three years, 4,600 Australian schools have beencustomers of EA – 50 per cent of the nation’s total schools’ market.
·The ability to cross-sell EA’sproducts to existing JAN expanding international customer and partner base, andexisting JAN products to EA’s schools and parent client base. This will beparticularly relevant for selling OECD PISA assessments to EA’s list ofAustralian school customer base.
·Material opportunity for back-officeefficiencies, and in using JAN’s assessments delivery technology to betterdeliver EA’s assessment content. JAN expects to achieve around $3M of costsynergies.
·Engine for profitable growth over the5 years post acquisition.
How hasEA performed in the 12 months since acquisition?
·98% reduction in customer complaints.
·Although test revenue was only $4.8M,it was 30% above management expectations.
·EBITDA was positive $2.3M, and netpositive cash flow (compared with -$1.7M in FY19).
·80% Gross Margin, with >90% GM aboveannual production cost.
·114 new schools and >4,000 newcontacts.
·>$5M revenue expected for FY21,indicating a return to growth (my spreadsheet assumes $6M).
·98% increase in % of schools withstated intent to buy next year. IMO, based on this, FY22 revenue should recoverto approximately $9.4M.
How isJAN likely to perform over coming years?
Beforecoming to a spreadsheet of my view on the growing profitability of EA / ICAS,following are the factual statements used in preparing it:
·98% increase in % schools with statedintent to buy next year (i.e. 2021 test)
·$2.3m EBITDA in 1H FY21 and positiveNet Cash Flow contribution
·Historical COGS + OPEX total wasaround $12M for breakeven EBITDA
·JAN intends to reduce total costs by40%, so $12M goes down by $4.8M to $7.2M
·For FY21+ ICAS is returning topre-Covid levels and global expansion
·>90% Gross Margin above annualproduction cost (COGS growing at <10% of Revenue growth)
And following are my assumptions used in preparing it:
·$9.4M of ICAS revenue for the 2021Test assumes schools with the stated intent to buy do so
·ICAS revenue will recover to previoussales levels of $15M by the 2022 Test (June to August)
·OPEX, after a major reductionfollowing acquisition, grows at around 10% per annum after FY21
·I have assumed that the $2.3M EBITDAfor the first half will be reduced for the fully FY21 (ongoing costs withlittle additional revenue)
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| ICAS 2019 test FY20 | ICAS 2020 test FY21E | ICAS 2021 test FY22E | ICAS 2022 test FY23E |
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| 1 | Total Revenue | 12.0 | 5.2 | 9.4 | 15.0 |
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| 2 | COGS | 4.2 | 1.0 | 1.7 | 2.6 |
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| 3 | Gross Profit | 7.8 | 4.2 | 7.7 | 12.4 |
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| 4 | Gross Profit Margin % | 65% | 81% | 82% | 83% |
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| 5 | OPEX | 9.5 | 3.0 | 3.7 | 4.4 |
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| 6 | EBITDA | -1.7 | 1.2 | 4.0 | 8.0 |
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| 7 | EBITDA Margin % | -14% | 23% | 43% | 53% |
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Ongoing EBITDA growth is expected based on likelycross-selling driving revenue increases, JAN's investment in increased Sales and Marketing capability, and the very high margins on additionalrevenue.
(20min delay)