Buy Education Development International (EDD) at 99p

A tip from SmallCapShares.co.uk

Education Development International has grown both revenues and profits rapidly in the past few years on the back of a mixture of organic and acquisitive growth. Currently trading on a lowly earnings multiple and offering a modest yield, we believe the shares offer good value for the further growth prospects on offer. We understand that investment legend Jim Slater is also a fan.

THE BUSINESS

EDI is a leading provider of accredited qualifications and assessment services. It also provides IT-based back office administration support services both internally and to third party clients. The company operates through three business segments:

UK Qualifications and Assessment Services
The firm's core operating division provides a range of over 380 nationally accredited vocational qualifications (NVQ's, Diplomas, Key Skills) to its 1,500 customers, generating over 200,000 candidate registrations per annum. Its customers include corporate clients such as J Sainsbury, Virgin Media and Quantas as well as leading training providers such as esg Group. These are assessed at one of over 1,400 registered centres and the company is the market leader with private training companies and for service sector qualifications. Its share of the vocational qualifications market stands at 10-12%, up from just 3% in 2003. There are also over 650 school customers for online assessment services.

International Qualifications
EDI has an exclusive licence to use the London Chamber of Commerce and Industry (LCCI) brand, which is seen as a mark of competence, especially in Commonwealth countries. The business has over 4,000 customers in over 100 countries and offers a range of 65 business qualifications. Its key markets are South East Asia, where the focus is on finance, and Europe, where English language qualifications are most popular.

Support and Broadband Services
This includes the secure online assessment platform i-assess and the provision of internet services through its 75% owned subsidiary Fusion Media. In this area, the business is phasing out low margin third party administration contracts.

Brand new tip this week on t1ps.com
Get 20 hot tips a year from Tom Winnifrith
Plus several hundred updates
And the diaries of legendary bear raider Evil Knievil
Click here to join t1ps.com and get a brand new tip this week

CURRENT TRADING

The year to 30th September 2009 was a landmark one for EDI as the it benefited from a full contribution from recent acquisitions as well as the impact of operational gearing as costs were held down. Thus, while turnover saw a 32% increase to GBP28.3 million, pre-tax profits more than doubled to GBP8.63 million. Moreover, the company was highly cash generative to the tune of GBP8.5 million.

More recent interims for the six months to March 2010 showed continued growth, with revenues up by 5.2% at GBP13.44 million, adjusted operating profits up 8.1% at GBP4.27 million and adjusted earnings up 7% at 6.1p. Net cash at the period end was very strong at GBP7.43 million and an interim dividend of 0.8p per share was recommended.

On the outlook the firm said that it expected to benefit from a major investment in apprenticeships and further education in the UK by the coalition government. While cautious until the government makes the details of its policy clear, the company said that it is competitively well placed to deal with any likely situation. Internationally, the company said it is making progress in growing its range of business and English language qualifications and sees it as an important development opportunity. Overall, results for the full year are expected to be in line with expectations.

OPPORTUNITIES & RISKS

With 75% of the group's UK qualifications revenue linked to publicly funded work-based learning programmes, the main risk to the business has to be its ultimate reliance on the public sector. Whilst it is obvious that the coalition government will have to tackle the deficit by imposing tight restrictions on spending, we believe the threat to training programmes is negligible.

Although the former government's Skills Investment Strategy highlighted savings and efficiencies of GBP340 million, it suggested a 3% increase in overall investment in 2010/11, and learner numbers in EDI's core areas of work based learning (typically funded through Apprenticeship and Train to Gain) are expected to increase by over 20%. Vocational training is also continuing to attract funding from Response to Redundancy programmes.

Moreover, the firm is by no means relying on increases in the training budget to fund growth. EDI is working hard to expand its offering to new corporate customers such as Sainsbury's whilst capturing a greater share of the training budgets of its existing clients. Meanwhile, its international brand is going from strength to strength and is already well established in Germany and South East Asia. This part of the business grew by 12% on a like-for-like basis in 2009; entry into new markets should ensure it continues to make progress in 2010.

VALUATION

Whilst the firm is unlikely to put in such a spectacular performance in 2010, we expect it to continue to augment earnings growth through bolt-on acquisitions - as it did in February with the acquisition of Peter Honey Publications for GBP1.1 million in cash. Indeed, it has ample leeway to do so given the debt-free balance sheet and large million cash pile. Most importantly however, EDI is well placed to capitalise on the initiatives that will undoubtedly be implemented by the incoming government to tackle the growing problem of youth unemployment. The demand for vocational qualifications in particular should continue to grow as the emphasis shifts to getting people back into work as quickly as possible. In order to support the next phase of growth, EDI's sales and marketing capacity has been increased, senior management has been strengthened, and the Campus administration platform is being upgraded. Notably, management believes that this investment in infrastructure will create a business that is capable of operating with two or three times the current level of revenue. On a forecast forward multiple of just 6.9 the shares look good value. BUY.

Key Data

EPIC: EDD
Market: AIM
Spread: 95p - 103p (7.8%)

Small Cap Shares serves up 3 hot tips a month and real time updates on the website on significant news from stocks covered. Although we will recommend AIM listed shares our focus is on fully listed growth plays ideal for building an ISA portfolio. For access to the latest tips at Small Cap Shares click here.