Mindchamps Preschool Ltd (SGX: CNE) is a leading premium preschool provider in Singapore. With a 20-year history, it is a well-established brand here. As of 2017, the company has a 38.5% share of Singapore’s premium preschool market.
I recently wrote an article stating that the company is well-poised for growth through partnerships with franchisees and acquiring centres overseas to increase its company-owned network. But investors should still be aware of the risks that could derail Mindchamps’ growth plans. In this article, I will highlight three such risks that investors should know of.
Delay of establishment of franchisee-owned centres
A large part of Mindchamps’ growth thesis surrounds the establishment of franchisee-owned and operated (FOFO) centres. The company earns a one-time fee from selling franchise licenses and collects recurring revenue in areas such as school fees, royalty fees, sales of merchandise and school event income afterward.
So far, the company has sold 180 franchise licenses, with just 54 currently in operation. There are 126 franchisee-owned centres that have yet to be established, which represents a significant growth opportunity for Mindchamps and is one of the reasons why I believe the company can continue to grow in the future.
However, there is the possibility that there may be delays or cancellations of the establishment of these 126 franchise-owned centres – if so, it will derail Mindchamps’ growth prospects.
International expansion risk
Although the Mindchamps brand is well-established in Singapore, it does not guarantee international success. Expanding overseas has its own set of risks. Right now, only nine out of Mindchamps’ 54 FOFO centres in operation are outside of Singapore. Of the company’s 126 franchisee-owned centres that are yet to be established, 108 are located overseas, in countries such as Australia, China, Myanmar, and more.
There are potential cultural and preferential differences between Singapore and the foreign countries in question, and each country has its own set of regulations and requirements. These challenges could be potential stumbling blocks for Mindchamps’ overseas expansion.
Mindchamps will also need to ensure that the quality of its FOFO centres is up to standard. This can become a challenge as the number of overseas centres increase.
Margin squeeze due to expansion
Finally, an increase in the number of centres does not necessarily equate to higher profits. New centres will certainly increase revenue, but they may not be as profitable as existing centres. This mismatch in profit margins between new and existing centres could squeeze the company’s margins.
Mindchamps also needs to be careful that (1) its new centres do not cannibalise existing centres, and (2) it does not over-expand to a point that new centres end up being unprofitable.
The Foolish bottom line
There are reasons to believe that Mindchamps has a long runway for growth, but it is important that investors realise that there are also business risks that could derail the company’s growth. Investors, therefore, need to weigh the risk-reward profile of Mindchamps before making an investment decision.
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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.