MindChamps PreSchool Ltd (SGX: CNE) had nothing short of an amazing year in 2018. Revenue and operating profit jumped by a staggering 62% and 33% respectively. Driven by strategic acquisitions of preschool centres in Australia, the total number of centres operated by MindChamps increased from 10 in 2017 to 18.
Beyond the headline numbers, here are three things that investors should take note of that could affect Mindchamps’ business and/or share price in 2019 and beyond.
Balance sheet deteriorating but still sufficient cash to fund a few more acquisitions
MindChamps’ tremendous growth in 2018 was largely driven by major acquisitions. However, these acquisitions obviously come at a cost. Over the course of the year, the company spent S$24.3 million on investing activities, far outpacing the operating cash flow generated of S$7.1 million. As a result, MindChamps’ net cash position declined from S$32.4 million at the end of 2017 to S$14.5 million at the end of 2018.
Although the company is still in a net cash position, it now has less than half of what it had a year ago. With the lower net cash balance, MindChamps will have less financial flexibility for acquisitions in the future, and as such will probably have to rely more on organic growth going forward.
Franchisee-owned and operated (FOFO) centres can continue to drive growth
Although acquisition-driven growth may be on the decline, MindChamps can still rely on the growth of its franchisee-owned and operated centres.
MindChamps’ franchise business is asset-light and has a huge profit margin. MindChamps typically collects a one-off
royalty franchise license fee of between S$70,000 and S$150,000 after a franchise agreement is sold. When a franchise centre is established, MindChamps then collects between 9% (for MindChamps Preschool Centres) and 15% (for MindChamps Reading & Writing Centres) of its franchisee’s revenue. A typical franchise agreement lasts six years.
As of 30 September 2018, MindChamps had sold around 180 franchisee licenses, but only 54 centres were in operation. As such, there are around 126 centres yet to be set up, that could potentially boost revenue from the FOFO (franchisee-owned and operated) segment. In 2018, the FOFO segment contributed around S$9.2 million in gross profit for MindChamps, a 22.6% increase from 2017.
Source: MindChamps 2018 analyst presentation
As mentioned earlier, the franchise business has a huge profit margin. In 2018, the FOFO segment had a gross profit margin of 92%, which dwarfs the self-same margin of 49% for the COCO (company-owned and operated) segment, and could, therefore, be a source of profit-margin-expansion for MindChamps down the road.
Finally, the company’s share price has fallen hard from its IPO price of S$0.83 in November 2017. Based on that share price, the company had a market capitalisation of around S$200.5 million and generated S$5.8 million in earnings for 2016, which gave the company an exorbitant price-to-earnings (P/E) ratio of 34.5, based on the 2016 earnings.
At the time of writing, MindChamps’ share price has slid to S$0.62. This translates to a market capitalsation of S$149.8 million, and a more reasonable P/E ratio of 23.4.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.