(Written 27 March 2008. Consult 'Investment Approach' tab for outline of what criteria gets a firm on the research list).

Tearsheet below this post.

Rated 65/100 quantitatively, as is, on recorded accounting data. Qualitatively, it has begun its ‘discovered’ phase although the only significant institutional holder is currently Marlborough UK Micro Cap Growth Fund (4.9%). A solid investment with some safe haven characteristics but unlikely to repeat is 2006/2007 price appreciation performance.

Education Development International (AIM:EDD) provides educational qualifications and assessment services for hopeful candidates pursuing vocational qualifications in such fields as finance and information technology (amongst others). Its year-end is 30 September; and the next interim results are released in May. The last set of annual accounts can be viewed here:

One of the first things that strikes when looking it over is the departure of the finance chief in December 2007. He left for a position in a smaller quoted company (Myhome International) whose shares are basically doing the inverse of the strongly performing EDD equity. However, closer inspection does not suggest anything sinister. Indeed, EDD is in what is probably one of the few markets that would conceivably benefit from an economic slowdown.

The price technicals reflect this; the shares were fundamentally good value by 2005; and extraordinary value at the financial end of 2006. The share price has moved to align with this during the last 15 months.

Yet it is still well positioned if not a screaming bargain. It is predominantly a UK company (70%) but with useful continental European exposure and important Hong Kong and Malaysian revenues. On an EPS broker forecast basis alone it is a comfortable ‘buy’.

Against that, the quality of EPS is worse than in previous reporting periods. The cause appears to be cash collection where debtor days have increased significantly. This in turn has had a knock on effect on the cash yield and liquidity ratios of the shares.

Moreover, a weak US dollar does not help; and where it has acquired using paper it has so far reduced its efficiency in sweating sales out of assets. Although management can always point to proportionally better (albeit modestly so) operating profit in 2007 given its asset base it is the same quality-diminished earnings which have made that possible.

These are hardly insurmountable obstacles and seem to be all linked to the 2007 acquisitions. Very importantly for a small cap, EDD has no long term debt. But some integration and execution risk is there and potential buyers ought to bear it in mind when coming to their own qualitative conclusions.

Exhibit: Education Development International tearsheet (IFRS from 2006):

Bookmark and Share


Related Posts with Thumbnails