ASX:EVO
Embark Early Education Ltd
Investment Summary
The fund managers believe that Embark Early Education Ltd presents a significantly undervalued opportunity in the childcare sector, currently trading at approximately $0.65. Their opinion is supported by a recent major restructuring that focused on profitable Australian operations, shedding less attractive assets. Embark's recent performance shows a return to profitability with strong revenue indicators and a valuation of ~8.5x earnings and ~4x centre EBITDA, which is a material discount to peers. They highlight the recent acquisition of nine childcare centres as a pivotal growth lever, projecting a potential 29% earnings accretion funded by a new $20m debt facility. Confidence in management, particularly CEO Chris Scott, is high due to his strong track record and focus on maintaining high occupancy rates across the centres. Furthermore, favorable macroeconomic conditions, such as increased government subsidisation and rising women’s workforce participation, are expected to bolster long-term demand for childcare services. The combination of these factors has led the fund managers to spotlight Embark as a key investment opportunity.
Commentary From The Managers
Cerutty Macro Fund
28 Feb 2024
$0.65
- Embark Education was an early addition to the Cerutty portfolio, highlighting a significantly undervalued opportunity.
- The company's restructuring, focused on Australia, is expected to enhance market appreciation.
- Embark returned to profitability in FY23 and indicated strong revenues for early CY24.
- Current trading metrics show Embark's substantial discount, with ~8.5x earnings and ~4x centre EBITDA.
- Recent acquisition of 9 childcare centres for $25.2m signals a boost in centre EBITDA.
- Funding plans with a $20m debt facility could lead to additional earnings accretion.
- Expected total additional operating earnings of ~$11.3m, enhancing capital return policy.
- CEO Chris Scott demonstrates strong industry acumen and a disciplined acquisition strategy.
- Embark's average occupancy rate peaked at 86.1%, outperforming peers.
- Macro tailwinds include government subsidies, population growth, and women’s workforce participation.
- Recent policy reforms aim to make childcare more accessible and increase demand.
- Long-term demand for childcare is predicted to strengthen as gender participation gaps close.
- Embark embodies Cerutty’s stock picking ethos, aligning macro trends and strong leadership.
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.