MindChamps Preschool Ltd (SGX: CNE) operates and franchises preschools, and reading and writing centers. The company has seen rapid growth since its listing in November last year. In the first nine months of 2018, revenue and operating profit increased by 58% and 34%, respectively, compared to a year ago.
The company has been aggressively using its capital from its initial public offering (IPO) to acquire preschools both locally and internationally to expand its company-owned network of preschools. In addition, Mindchamps is actively looking for franchise partners.
With its well-recognised brand, I believe that Mindchamps is well-positioned for continued growth. Here are two reasons why.
Strong pipeline of franchise schools
MindChamps currently has sold a total of 180 franchise licenses, of which 54 are operational. As such, there are an additional 126 centres yet to be established.
Source: MindChamps 2018 third-quarter analyst presentation
MindChamps collects a one-time fee from licenses sold. More importantly, the company earns recurring revenue from school fees, royalty fees, sales of merchandise, and school event income.
In the first nine months of 2018, Mindchamps’ recurring revenue increased by 60% from S$13.8 million a year ago to S$22.1 million. With a large number of franchise centres in the pipeline, recurring revenue will likely grow in the future.
Full-year contribution from the acquisition of company-owned centres
Company-owned-and-operated (COCO) centres is another growth avenue. MindChamps acquired seven preschool centres in Australia and Singapore in the first nine months of 2018, taking its total COCO centres to 17 as of 30 September 2018. In November this year, the company acquired another preschool centre in Australia.
The aforementioned acquisitions have yet to contribute a full-year’s worth of revenue to Mindchamps. So, their full-year contributions starting from 2019 will likely boost the company’s bottom line going forward.
MindChamps also has plenty more cash in its arsenal to make further acquisitions in the future. It allocated S$34.5 million of the capital raised from its IPO to fund expansion plans. As of 30 September 2018, the company had only utilised S$12 million, with S$22.5 million remaining in its war chest. The company’s balance sheet is also strong, with S$31.7 million in cash and equivalents and just S$19.9 million in total debt at end-September 2018.
The Foolish bottom line
Since its listing in November last year, MindChamps’ share price has fallen by more than 40%. One of the reasons for the decline was perhaps the company’s high valuation at its IPO; back then, MindChamps was trading at more than 40 times trailing earnings according to data from S&P Global Market Intelligence.
However, at MindChamps’ share price of S$0.52 currently, the valuation looks much more palatable with a price-to-earnings (PE) ratio of 25. It is a valuation that I believe could prove to be a bargain down the road.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.