Pie Funds newsletter

Pie Funds still very bullish, with a large(for them) write up in their latest newsletter.

From Pie newsletter:
"Taking a look through our portfolio this month, we have had multiple insider
buying across four stocks. One example is Kip McGrath (ASX: KME), which had
three insider purchases in March.

During the pandemic, KME was able to pivot its business model towards online
tuition, which helped the business remain profitable when its face-to-face locations
couldn’t operate. The online capability also expanded the addressable market to
students who could not make it to physical centres for education. Covid has meant
a disrupted environment for kids learning over the last two years. Many kids are
now requiring extra remedial education, and KME is the best brand in the market
to provide this.

From a financial perspective, the market has been slow to realise KME is buying
back franchisees at very attractive valuations and have repurchased all possible
master franchise agreements. KME is also improving the student numbers in
the centres they run as corporate centres. A typical franchisee centre will have
less than 100 students whereas a corporate centre can achieve an average of 120
students in year one, increasing to 200 in year two from a more refined marketing
campaign. The unit economics are compelling for corporate centres. “Customer
Acquisition Cost has remained stable at AU$200 for corporate centres made up
of advertising and student assessment. The initial ‘first stay’ value of the student
across the group approximates at AU$2,000, with lifetime value higher as students
return in subsequent years for additional assistance.”

We see evidence that KME can achieve significant synergies by running
franchisees as corporate centres where they benefit from the best-in-class practices
and a targeted direct marketing approach. We believe corporate centres can
earn $10m revenue in FY23, i.e. over 50% growth at 20%+ EBITDA margins. An
entire network of over 500 franchisees evidences the long runway ahead to keep
acquiring franchisees. We feel KME won’t make it to this stage, though, as it is
a likely takeover target. KME has had private equity interest before as it takes a
lot of time to build out a global franchisee network of over 500 centres and an
established brand.

KME will be growing EBITDA by over 30% and is trading on a ~7x FY23 EBITDA
multiple. Franchisor business models are some of the best as they are capital-light,
have consistent revenue streams, and have excellent cash flow conversion, ie. the
EBITDA is real cash."