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Is it time to invest in ASX education shares?

With the COVID-19 pandemic pushing many students to online learning, now may be time to invest in ASX education shares.

An ABC News article recently shed light on the surging demand for academic tutors. In addition, the article touched on the inadequacy of some academic school curriculums.

Some ASX education shares could be poised to benefit from the surging demand for academic tutors and support services.  

What’s fuelling the demand for tutors?

According to the ABC article, the COVID-19 pandemic has revealed glaring holes in Australia’s educational system.

With lessons moved online during the height of the pandemic, some parents were confronted by how far behind their children were with schoolwork.

In order to compensate, many parents have turned to tutoring services for additional educational resources. Some tutoring services have doubled the number of children on their books since the pandemic began.

The pandemic has also prompted a review of school curriculums.

The Australian Curriculum Assessment and Reporting Authority announced a review of the national prep to year 10 curriculum in June. The aim of the review is to streamline student workloads and lessons.

Given the weaknesses exposed in the education system, there are some companies listed on the ASX that could potentially help fill in the gaps.

Which ASX education shares could benefit?

3P Learning Ltd (ASX: 3PL) is an online education platform that offers a range of resources covering core subjects such as mathematics, spelling, literacy and science. 3P Learning’s platform currently boasts more than 5 million students from more than 17,000 schools around the world.

The company released its FY20 report last month and also revealed a takeover bid from United States-based IXL Learning. For FY20, 3P Learning recorded an 18% decline in underlying earnings before interest, taxes, depreciation and amortisation (EBITDA) of $14.6 million. 

3P Learning cited an increase in sales and marketing expenditure in the Americas region for the lacklustre performance. Despite a weak financial performance, 3P Learning reported promising customer retention in the Asia Pacific, Europe, the Middle East and Africa markets.

Kip McGrath Education Centres Limited (ASX: KME) is another company that could benefit. Kip McGrath provides tutoring to primary and secondary students for a wide range of core subjects. The company operates on a franchise business model with operations in Australia, the UK, South Africa and New Zealand.

Prior to the COVID-19 outbreak,  Kip McGrath provided 36,000 face to face lessons and 550 online lessons on a weekly basis. As a result of global lock-downs and social distancing measures, the company has expanded its online operations. In May, the company recorded a milestone of 20,000 online lessons while face-to-face tutoring dropped to 2,400 per week.

Kip McGrath has identified online tuition as a key market and growth opportunity that offers higher margins than traditional tutoring. As a result, the company completed a $5.9 million capital raise in June to accelerate the growth of its online platforms.

Foolish takeaway

The services provided by 3P Learning and Kip McGrath will not replace traditional teaching formats. However, they could become more popular as an auxiliary service. 

The convenience and high margins of online tutoring could also gain traction as they appeal to both customers and companies alike. The potential in this space has been reflected in the takeover offer for 3P Learning, with IXL’s slapping an enterprise value of $166.7 million on the company. 

In my opinion, auxiliary education providers like 3P Learning and Kip McrGath are poised to boom in 2020 and beyond. 

These 3 stocks could be the next big movers in 2020

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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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