Redhill Education Ltd (RDH)

RDH was recommended to me by a friend about 5 years ago. I didn't buy and haven't really followed the stock for years now, however I  was recently reminded of it when researching another education company. Anyway, I've just finished reading through the annual reports back to 2010 (when it commenced life as a listed company), along with the 2010 prospectus and the cataclysmic earnings downgrade in 2011.  

The stock has presented tremendous opportunities to both lose and make money, and I think its history is both incredibly interesting and informative. You can see what I mean from the graph below: 

Source: Yahoo Finance

RDH listed back in September 2010 for an issue price of $1. 

RDH was already an existing company of two education businesses. The $16m capital raising was to buy two more education purposes and so creating a horizontally integrated business of what looked like quite different educational units. The CEO and CFO were new to the business. Original shareholders do not sell their shares into the float and put their stock in escrow. The prospectus (August 2010) forecast pro-forma 2011 Revenue $21.4m, EBITDA $4.9m, NPAT $3.4m, 12.6c EPS and a 3c DPS. No debt. Compared to an initial market cap (non-diluted) of $27m, this all looks pretty cheap and the stock rallies to $1.24.

So far, so good. 

7 February 2011 was a shocker. RDH downgraded in a massive way. FY11 forecast EBITDA was cut down from $4.9m to $1.1m. That's massive. All sorts of reasons were given for the downgrade: 

The stock tanks from 77c to 23.5c (note it had been drifting down from $1.24 to 77c from September to February). The CEO resigns later that month. The price keeps drifting lower to 10c in June 2011 tallying a 90% loss for investors in the float. FY11 does indeed turns out to be a shocker posting a pre-tax $3m loss although operating cash-flows are only just negative. The market cap is $3.5m v book value of $15.1m. 

Fast forward to FY12. New CEO (one every year so far). Lots of restructuring. Lots of write downs to assets. Book value drops from $15m to $6.7m. The stock wallows at 9c. Operating cash-flow is actually slightly positive - most of the P&L is hit by write-downs to the balance sheet in different areas. 

So what it looks like so far is a revolving door of management, macro issues and all at the same time trying to bed down two simultaneous acquisitions. You wouldn't touch it with a barge poll, right? 

FY13. The stock has more than doubled to 21c when the preliminary full year figures are released (July 2013). The numbers are looking much better. Revenues up, EBITDA is positive and operating cash flows are an impressive $1.6m. Lots of cost-cutting, new products, re-structure and possibly a better macro environment. At a market cap of ~$6m, the stock is starting to look cheap. 

FY14. The company reports a blinder and the share price has moved up to the $1.40 range. Revenues up 19%, NPAT is finally positive, EBITDA $2.7m and $3.2m in operating cash-flows and $6m in the bank. Just think the whole company was worth $3.5m in FY12. 

And forecast FY15 has more of the same big improvements. 

Note the original prospectus numbers have still not yet been met. 

So there was potentially a 14x return there. More conservatively 5-7x if you were buying as the positive news started rolling in 2013. 

Kristian 

Disclosure - no position in the above name(s)