3P Learning Well Placed For Growth

This story features 3P LEARNING LIMITED. For more info SHARE ANALYSIS: 3PL

-Capitalised for acquisitions
-Growing scale in Americas
-Competitive tensions to rise
 

By Eva Brocklehurst

Global online education provider, 3P Learning ((3PL)), is well placed to deliver material earnings growth in the next few years as it expands offshore and increases its revenue in mature markets such as Australia. First half earnings were ahead of expectations, with licences in the core Australian market growing strongly.

Macquarie welcomed the addition of 200,000 licences in the half year, which had not been forecast given the sales cycle. The company recognises revenue from its Mathletics, Spellodrome and IntoScience sales over a 12-month licence period, so the first half results reflect the prior half’s sales. The broker expects cash flow will re-emerge strongly in the second half as the balance sheet reflects the peak sales period of February to June. Recently, sales staff have been added in the US and the analytics enhanced, in anticipation of the key selling period in that region from April to June. Macquarie believes the company is on track to meet prospectus forecasts in this area.

The broker also believes there is considerable leverage to be gained once price rises flow through in local operations. Macquarie has taken a relatively conservative view on pricing power in the domestic market, in light of feedback on the current 15% price increase. The broker has also taken a conservative approach to the uptake of IntoScience as, while promising, it is a new product. IntoScience will be released in the Americas and Europe/Middle East in FY16. Macquarie retains an Outperform rating and $3.00 target.

The company remains well capitalised and able to make future acquisitions, likely to be in platform, product and data analytics, in the broker’s view. The most likely region is in the Americas, where the business is currently building scale. A first dividend is expected to be declared in FY15 and paid in FY16. Directors are targeting a pay-out ratio of 20-30% of statutory net profit.

The growth in Australia in the first half was greeted positively by Deutsche Bank, given growth was weak in FY14. Average revenue per unit was $8.40, against prospectus guidance for FY15 of $8.32. In Europe/Middle East the company requires an additional 270,000 licences to reach its prospectus forecasts, implying a large second half skew in the broker’s analysis. In the Americas, revenue was up 64% but licence numbers were slightly disappointing, relative to Deutsche Bank’s expectations. Nevertheless, the broker remains attracted to the highly scalable and cash generating business model, as well as the robust earnings profile and solid balance sheet. 

The company highlighted independent research which signalled that its Mathletics students perform up to 9% better in standardised testing. These findings are likely to prove beneficial in marketing in Mathletics in new jurisdictions, in Deutsche Bank’s view. The broker’s Buy rating and $2.90 target are underpinned by the robust earnings growth profile and supportive valuation. Competition is considered the major risk factor. The industry is currently generating excess returns and as a result Deutsche Bank expects competitive tension will increase.

3P Learning provides exposure to the high-growth online education sector, offering personalised and interactive cloud-based education for primary and secondary schools. The company has a strong presence in Australia and the UK and is growing in the US.
 

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