[Update]
CMP NSE Mar 11, 15:52 Rs. 75.95, 52 WK LOW/HIGH 70.60/469.00
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Stock Idea: Tree House Education & Accessories Ltd (THEAL)
About Tree House Education
Tree House Education & Accessories Ltd (THEAL) is one of the leading educational services providers in India having operation of maximum number of self-operated pre-schools. Tree House's curriculum and trained teachers are evidence of its standards of excellence. Since last few years, Tree House has started day care services at its existing pre-school centers across the globe. It is a pioneer in offering such type of organized quality day care facilities leveraging its brand name and infrastructure in 190 centers nationwide. Find more about Tree House Education at official site>>>Huge Potential in Day Care Services Business
Company’s Day Care Services business is witnessing tremendous growth due to encouraging response from the parents and the company believes that this service will contribute significantly to revenues in the future.
Long term outlook for the day care services is very robust as the whole market in India is just started and waiting to get explored in a bigger way.
Every one knows that the number of women getting in to the work place is increasing every single day. If we look at the these trends in coming ten to fifteen years perspective there would be a scenario where couples will work and their discretionary spending would go into different kind of habits and obviously the demand for their children’s day care services will be much higher than present status.
In addition to this, most of the younger parents are well educated unlike a generation back. Even in smaller cities with the internet accessibility, the awareness to send the children is also growing. So the market size over the next five or ten years is going to grow significantly. Huge Potential in Day Care Services Business
Tree House is the only company poised to take this huge opportunity because there is no other company with pan India presence offering day care services for children in the age group of 1.5 to 8 years.
Even existing branded players have difficulties in starting day care services with their franchise business model where as Tree House operates with its own schools.
Tree House is also entering into tie-ups with large employers in the IT, ITES, Banking and consulting companies to provide day care services because of large women workforce in these companies.
These women employees are mostly software engineers and young mothers and would like to have a day care facility very close to where they are working. Tree house is building unique strategy by providing pre-school as well as day care services in cities like Pune, Hyderabad and Bengaluru.
With the increase in day care revenues, the profitability of the company grows further as the company utilize same pre-schools assets more and more for day care. The EBITDA margin this business is significantly higher and is about 80%-85% because lot of the rental cost is factored in pre-school operations.
K-12 Monetization as planned
Company is monetizing its investments in K-12 schools by selling this assets to other players and despite that company will continue to provide school management services to all these
It has monetized its first K-12 assets for 17.1 crores and has signed an MOU for the second one of 52.5 crores. Company is using the divestment proceeds towards paying down debt and deleverage the balance sheet.
Presently there are 24 K-12 schools to which company provides school management services. These K-12 schools are natural extension of the pre-schools segment and many of them act as feeders to K-12 schools.
Company has already invested in infrastructure of five these K-12 schools. The current occupancy at these schools is about 35% and in coming five years, it is expected to grow to 75% with increase in the utilizations.
As the business matures, capacity utilizations and realizations will go up and this leads to expansion in margin numbers and capital efficient numbers. The margins in K-12 services business will be around 70% to 75%
We believe the steps towards asset light business model in this segment will increase efficiency of the company and also provide scope for much faster expansion.
Clarification on corporate governance issues
Stakeholders Empowerment Services (SES) is a proxy advisory firm which provides Corporate Governance research and advise investors on matters that pertains to Corporate Governance.
SES, as per its policy had mailed its Proxy Advisory Report for the Annual General Meeting of Tree House Education & Accessories Ltd (‘Tree House’) to the Company. In the Report, SES had raised concern over the Debtors of the Company under ‘Key Issues’.
Company has taken quick action to clarify the issue and met with SES in their office on 28th Sep, 15 and provided clarification on high ‘receivables’. After the meeting, Tree House have also sent two emails on the same day, clarifying this issue.
In the communications Tree House has given bifurcation of their debtor’s business wise and explained nature of contracts that they have under their K12 school management. In further statement by SES, it said “in view of the disclosures made by the company, SES is of the opinion that company has explained the issue satisfactorily and shareholders may please note the same.”
We believe these issues are very small and does not effect the company’s business. We have already identified company’s aggressive accounting when we have given this idea for the first time and we believe it is the nature of the business.
Pledging issue has been cleared
One of brokerage company, in its research report has incorrectly stated that the promoters have pledged their 100% equity holdings. This statement was further iterated in a news report titled "Promoters continue to pledge shares in Dec quarter", appearing in Business Standard on March 10, 2015.
In relation to the QIP, as is customary in such transactions, promoters agreed to not sell or dispose of equity shares of the Company held by them for a period of 90 days from December 23, 2014 ("Lock-up Arrangement"). The Lock-up Arrangement neither creates a pledge, nor has it been entered into in pursuance of a loan facility. Consequently, this does not create an interest in favor of any party.
However, the Promoters have currently pledged 3,407,000 equity shares of the Company held by them (amounting to 8.05% of equity share capital of the Company and 27.82% of the equity shares in the Company held by Promoters). These pledge arrangements have been disclosed in accordance with the applicable law.
Tree House Education & Accessories Ltd (THEAL) has clarified in relation to the erroneous statement in the Research Report on the quantum of pledge of Promoters shareholding of the Company. The brokerage company has regretted the mistake and in a consequent research report dated March 4, 2015, clarified that the pledged shareholding of the Promoters of the company is 27.8% and not 100% as stated earlier.
Financial Facts of Tree House Education & Accessories Ltd (THEAL)
- MARKET CAP (RS CR) : 322.45
- P/E : 5.97
- BOOK VALUE (RS) : 152.36
- DIV (%) : 20.00%
- INDUSTRY P/E : 15.63
- EPS (TTM) : 12.76
- P/C : 3.99
- PRICE/BOOK : 0.50
- DIV YIELD.(%) :2.62%
- FACE VALUE (RS) :10.00
Key Highlights
1.) Presence in a growing sector:- Company is in a space which is a growing sector which is expected to grow at about 26% to Rs.42.8 Bn.
2) Good Brand Recall: Company has a good brand recall and has built good reputation. This has helped the company to increase student headcount which has enhanced revenues and profitability.
3.) Strong consumption theme :- The stock is a proxy play on the education theme and offers immense potential considering the increasing spend on education which offers structural long term demand.
4.) Strong return on Incremental Investments:- The company is making investments in new schools which over a period of time will enhance its capacity utilization to about 80% thereby creating strong return ratios.
5) Asset Light Business Model:- The company owns K-12 assets which it plans to monetize by selling its assets which will bring down its asset size thereby ensuring an asset light business model.
6.) Strong & Healthy Balance sheet :- Company has a very strong balance sheet with high cash and
investments that throws light on the quality of the business.
7.) Presence in growing Markets :- Company is currently present in Mumbai but is also taking steps to de-risk its business by venturing outside Maharashtra.
8) Margin Accretive:- The company’s margins are likely to improve going forward as increasing headcount will decrease the cost which will help the company to remain margin accretive.
9.) Management/ Corporate Governance :- The company has a good management and adhere to strong corporate governance norms. The company is run professionally by a team of professionals who have a strong understanding of the business and have a strong vision about its business.
10.) Compelling Valuations :- In spite of so many advantages, the company is quoting at very attractive Valuations. The company is quoting at 5.9x its TTM earnings which is reasonable for the Quality of this stock which has strong market share which provides revenue visibility.
Brokers Views and News on Tree House Education & Accessories Ltd (THEAL)
- Market good to go long; like two-wheeler space: Pros
- Prefer Career Point, Zee Learn, Tree House: Harendra Kumar
- Matrix Partners sells 42.97 lakh shares of Tree House
- Tree House standalone Dec '15 total income from operations at Rs 55.78 crore
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