Shares in school age online education business 3P Learning Ltd (ASX: 3PL) are around 8 per cent higher in afternoon trade, despite the company releasing no specific news to the market. The business currently has around 17,500 schools globally signed up to its online learning products that include Mathletics, Spellodrome and Reading Eggs.
Once considered one of the ASX's hottest tech stocks, 3P Learning has been in the doghouse with investors ever since it posted falling profits for the six-month period ending December 31 2015. The company blamed the disappointing result and slowing growth on increased investments in sales staff alongside pricing pressure on its products amidst a competitive environment.
As a result of the increased costs core underlying EBITDA dropped 21 per cent to $13.3 million for the full year ending June 30 2016 as the stock hit a record low of 62 cents versus its July 2014 IPO price of $2.50 a share. Notably investment management giant and substantial shareholder Macquarie Group Ltd (ASX: MQG) almost immediately dumped its shares in the business post IPO, alongside other insiders. After this red flag it was pretty much all downhill for the share price as the business started to reveal results that investors were not expecting.
It posted underlying earnings per share of 3.9 cents in FY16 that would place it on around 25x trailing earnings, which is a lofty ratio that reflects management's forecasts and investor expectations for strong earnings growth in FY17. It has a 3-year strategic plan beginning in FY17 that it expects to produce accelerating revenue growth in FY18 and FY19.
Outlook
Much will depend on whether the business can meet its forecasts this time around and given the poor track record as a public company this looks a stock to watch from the sidelines for now. However, its scalability and global growth potential mean it remains an interesting prospect for small-cap enthusiasts.
Others in the online education space include micro-cap family-run operator Kip McGrath Education Centres Limited (ASX: KME), and English language testing business Idp Education Ltd (ASX: IEL). The latter I am not keen on due to its business model, while Kip McGrath looks reasonable value but remains high-risk and for experienced investors only.
