KGIC Inc. (fka LGLTF)

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Under Valued, Under-Appreciated Education Roll-Up Story

Value Investing Presents An Under-Appreciated Education Roll-Up Story
Oct. 15, 2014 6:00 AM ET | About: Loyalist Group Ltd (LGLTF) V.LOY Subscribers to SA PRO had an early look at this article. Learn more about PRO »

Summary

Under-appreciated story with little following that’s yet to be fully understood by the market with excellent growth potential.
Large and extremely fragmented market filled with “Mom & Pop” operators with no exit strategy; M&A has historically been accretive; and there is no direct competition.
Meaningful organic growth: strong government support for the industry; market share gains as Loyalist’s relative strength, size and brand recognition increase; and new initiatives, such as student housing and franchising.
Targeting a 16.3% EBITDA margin and FCF of $0.05/share by 2016E with net cash on the balance sheet as Loyalist realizes the full impact of synergies from acquisitions.
Target price of $0.99, or ~133% upside. Understanding the implications of recent M&A, the seasonality of the industry, and upcoming catalysts is critical to timing this compelling trade opportunity.
INTRODUCTION
Different languages are constantly being spoken all around us. Think about it - on any given day, how many different kinds do you hear? The nature of today's globalized world practically demands the study of multiple languages, both on a personal and a professional level. Companies and governments understand the need to invest in language training, and so should you. I believe that this article will sway you with some very compelling reasoning, as to why I like this company, and why now presents an excellent entry point.
Loyalist Group Ltd. (OTC:LGLTF) is an educational organization that owns and operates private English as a Second Language (or "ESL") schools, career and community colleges, and secondary schools for foreign students, with 25 campuses throughout Canada. I believe that it's a very under-appreciated story yet to be fully understood by the market, and with exponential growth potential through the roll-up of a segment of the private education market in Canada.
The overwhelming majority of accredited schools in this highly fragmented industry are run by "Mom & Pop" type operators, and are undercapitalized with no real exit strategy. Loyalist is in the early stages of consolidating the sector and has already made 16 acquisitions over three years, reaching an expected revenue run rate of ~$63 million for 2014. The market size in Canada for ESL alone is ~$788 million (~$500 million is tuition fees), hence there is significant room to consolidate the sector over time, especially given the absence of any direct competition.
In addition to M&A, we have begun to see meaningful and evident organic growth. During 2013, revenues (excluding acquisitions) grew 4.5% Y/Y; up to 8% 1Q14, and 12% 2Q14.
I have derived a target price of $0.99 for Loyalist based on 2015 forecasts using a 10x EV/EBITDA multiple, which represents an upside of ~133% from Friday's close. I believe that Loyalist could exit 2014 with a revenue run rate of ~$66.1M, EBITDA of ~$8.7M, cash of ~$5M and fully diluted shares of ~148M. I believe that Loyalist could exit 2015 with a revenue run rate of ~$115.5M, EBITDA of ~$16.8M, and no need for further dilution. Debt can be used to supplement cash in acquisitions, and organic growth will improve the bottom line as well as EBITDA.

Read more : http://seekingalpha.com/article/2562605-loyalist-group-ltd-globalism-language-and-value-investing-presents-an-under-appreciated-education-roll-up-story