Fund Manager Summary
The fund managers believe that Embark Early Education Ltd presents a significant undervalued opportunity in the childcare sector, driven by strong macro tailwinds. In their opinion, the recent restructuring, which included divesting a loss-making New Zealand business, positions the company for growth, as evidenced by its return to profitability in FY23 and promising early CY24 revenues. The acquisition of nine childcare centres at a 4x EBITDA multiple is expected to enhance earnings significantly, with potential for ~29% earnings accretion. Moreover, the management, led by CEO Chris Scott, has demonstrated exceptional operational efficiency and a commitment to maintaining low acquisition multiples. With ongoing government support and rising female workforce participation, the fund managers foresee a long-term demand for childcare services, making Embark a compelling investment in an evolving market.
Source: Trading View
Commentary From The Managers
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NGE Capital
31 May 2025
$0.70
Summary
- NGE Capital highlights a recent transaction in the childcare sector that emphasizes the attractive valuation of Embark Early Education Limited (ASX:EVO).
- A US private equity firm acquired a minority stake in Young Academics at an implied EV of ~$200m, with an EV/EBITDA multiple of ~10-12x.
- Young Academics operates 43 centres and is expected to generate FY25 revenues of ~$100m, with earnings around $20 million.
- Despite similar size to Embark, NGE Capital believes Embark has higher EBITDA margins at ~22%.
- Young Academics faces challenges in maintaining occupancy due to rapid centre openings.
- Embark’s strategy involves acquiring established centres at a significantly lower EV/EBITDA multiple of ~4x, presenting a better risk-reward scenario.
- Applying Young Academics' acquisition multiples to Embark suggests a valuation range of ~$1.30-1.60 per share, well above its current price of $0.70.
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Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.
Commentary From The Managers
NGE Capital
31 May 2025
$0.70
- NGE Capital highlights a recent transaction in the childcare sector that emphasizes the attractive valuation of Embark Early Education Limited (ASX:EVO).
- A US private equity firm acquired a minority stake in Young Academics at an implied EV of ~$200m, with an EV/EBITDA multiple of ~10-12x.
- Young Academics operates 43 centres and is expected to generate FY25 revenues of ~$100m, with earnings around $20 million.
- Despite similar size to Embark, NGE Capital believes Embark has higher EBITDA margins at ~22%.
- Young Academics faces challenges in maintaining occupancy due to rapid centre openings.
- Embark’s strategy involves acquiring established centres at a significantly lower EV/EBITDA multiple of ~4x, presenting a better risk-reward scenario.
- Applying Young Academics' acquisition multiples to Embark suggests a valuation range of ~$1.30-1.60 per share, well above its current price of $0.70.
Summary
NGE Capital
27 May 2025
$0.70
- Provider of Early Childhood Education, operating 38 childcare centres in Australia.
- Acquired 14 centres in 2024 for a total purchase cost of ~$40m at an average centre EV/EBITDA multiple of ~4.1x.
- Financial flexibility with ~$10m cash and ~$21m capacity under bank debt facility for further acquisitions, including 2 centres due to close shortly.
- Market context highlighted by US PE firm Seidler Equity Partners acquiring an interest in Young Academics for a reported ~$200m EV, implying a ~10-12x EBITDA multiple.
- Strong government support for broader childcare access with higher childcare subsidies and educator wage subsidies.
- Ongoing scrutiny of the industry following negative press.
- Solid cost control achieved by operating centres at a local level and avoiding unnecessary cost overlays.
- Highly cash-generative business with minimal ongoing capex.
- Valuation attractiveness as it continues to trade very cheaply on an absolute basis and compared to listed peers with poorer operational performance.
- Current dividend yield of ~8.5% (~12.2% grossed up for franking); earnings growth expected to drive higher dividends.
Summary
DMX Asset Management
31 Mar 2025
$0.73
- DMX Asset Management notes EVO reported an 11% growth in underlying EPS to 7.9c for FY24.
- Despite a drop in occupancy across the industry and EVO, margins remained strong due to a reduced proportion of under twos.
- Acquisitions in 2024 anticipated to drive strong earnings for FY25.
- Monitoring regulatory developments, especially regarding the potential abolition of the activity test in January 2026.
- Belief that regulatory changes could significantly boost demand in the sector, benefiting EVO.
- EVO currently trades at a 9x PE ratio with a 7.5% fully franked yield.
Summary
DMX Asset Management
28 Feb 2025
$0.78
- DMX Asset Management notes that EVO reported 11% growth in underlying EPS to 7.9c for FY24.
- Despite industry-wide declines in occupancy, EVO maintained strong margins due to fewer under twos in total children.
- Anticipation of a positive FY25 as 2024 acquisitions are expected to drive earnings.
- Close monitoring of the regulatory backdrop regarding potential abolition of the activity test in January 2026.
- This regulatory change could significantly boost demand in the sector, benefiting EVO.
- EVO currently trades on a 9x PE and offers a 7.5% fully franked yield.
Summary
DMX Asset Management
31 Oct 2024
$0.78
- DMX Asset Management continues to monitor Evolve (ASX:EVO) due to its recent activities in the childcare sector.
- EVO successfully raised funds for the acquisition of an additional 7 centres, enhancing its operational footprint.
- The company reported a 21% increase in revenue for the year-to-date, driven by both organic growth and acquisitions.
- EVO achieved a 23% rise in centre EBITDA, highlighting improved financial performance.
- Market conditions for childcare remain buoyant, with a positive outlook for occupancy growth.
- While regulatory changes are anticipated, EVO remains optimistic about potential enhancements in earnings.
- The evolving regulatory environment is expected to impact the sector, particularly post-election.
- DMX Asset Management values EVO's position as an important part of Australian social infrastructure in the long term.
Summary
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.
Summary
Please note: The completeness, accuracy or current status of the investments referenced are not guaranteed.
ANALYST INSIGHT
Equity Research Analyst
"With macro tailwinds propelling demand and a management team that knows how to leverage growth, Embark Early Education Ltd seems poised for a breakout. Trading at a steep discount, it appears the market has yet to fully grasp the potential of this turnaround story."
Last Updated: 31 May 2025
Query The Data
Frequently Asked Questions
Who is investing in Embark Early Education Ltd (ASX:EVO)?
Fund managers including Cerutty Macro Fund, DMX Asset Management and NGE Capital have invested in Embark Early Education Ltd (ASX:EVO).
Why do fund managers invest in Embark Early Education Ltd?
Fund managers are investing in Embark Early Education Ltd due to its significant undervaluation and strong growth potential following a successful restructuring. The company has returned to profitability, showing robust revenue growth, and trades at a considerable discount compared to peers. Key macro tailwinds, such as increased government subsidies and rising female workforce participation, support long-term demand for childcare services. The management team, led by CEO Chris Scott, has a proven track record in efficient operations and strategic acquisitions, enhancing confidence in future earnings growth.
What happened to Embark Early Education Ltd (ASX:EVO)?
There have been no recent updates from fund managers regarding Embark Early Education Ltd although fund managers including Cerutty Macro Fund, DMX Asset Management and NGE Capital have previously commented.