Meten EdtechX (NASDAQ: EDTX) (NASDAQ: EDTXW) Shows
Compelling Value Compared to Red-Hot Chinese Online Education
Industry Average
March 12, 2020 -- InvestorsHub NewsWire -- via Spotlight Growth --
Global stock markets continue to see extremely volatile trading in
recent weeks, as the coronavirus outbreak officially reaches
pandemic levels. The overall flight to safety has led to a surge in
U.S. Treasury bond prices, as yields were crushed to record lows.
Major corporations are continuing to warn about the likely hit to
their top and bottom earnings as a result of the outbreak and its
disruption to supply chains.
However, it has not been all bad news in the equity markets.
Surprisingly, there are even some industries that have been
benefitting from the outbreak. Outside of toilet paper and hand
sanitizer suppliers, Chinese online education companies have
largely not only outperformed the broader market, but they are
seeing positive returns thus far in 2020.
Source: Meten EdtechX
Before the outbreak, the Chinese online education industry was
already drawing a strong outlook consensus from the investment
community. However, with the outbreak closing down traditional
classroom learning, millions of students have had to turn to online
education opportunities. This has led to what Bloomberg described as
one of the “biggest sustained, mass experiment in online education
since the internet was founded in the 1980s.”
While Chinese digital education stocks have seen strong upward
moves over the past month, one company that could be next to make
waves is Meten EdtechX (NASDAQ:
EDTX) (NASDAQ:
EDTXW).
EDTX: Meten Merger Estimated to Close March 30,
2020
EdtechX is a London-based education technology company, which
also happened to be the first edtech SPAC (special purpose
acquisition company) to be listed on the Nasdaq. The company's
common shares are listed under the symbol "EDTX," while its
warrants trade under the symbol "EDTXW."
As of March 11, 2020, EDTX has returned 0.42% year-to-date,
while EdtechX’s warrants, EDTXW, have soared 24.63% since the start
of 2020.
Source: EDTX Investor Deck
In December 2019, EDTX announced a $535 million merger agreement
with Meten Education, an omnichannel Chinese education company
based out of Shenzhen. The merger is estimated to close on March
30, 2020.
Meten is a market leader in English language training and
education services across China. Being based out of Shenzhen,
China’s “Silicon Valley,” Meten is in a prime location to continue
capturing growth. The company’s Likeshuo digital
education platform has seen strong enrollment growth as a result of
the coronavirus outbreak, according to a recent press release from
the company.
Between February 1-17, 2020, Meten disclosed that its gross
billings for its online courses surged 287% year-over-year,
including the number of new paying users which grew by 119%
year-over-year. Meten noted that the massive growth was “driven by a
combination of continuous enhancements to the company’s digital
offering and the impact of the coronavirus epidemic on the Chinese
education industry.”
In 2018, Meten reported revenues of $200 million (RMB 1,424m)
and $20.1 million (RMB 144m) in EBITDA. This is a strong increase
from Meten’s 2016 results of $113.9 million (RMB 802m) in revenue
and $2.4 million (RMB 17.1m) in EBITDA. Overall, this represents a
two-year revenue CAGR of 33% and EBITDA CAGR of 190%.
Meten EdtechX: Recent Filings Show Strong Operational
Progress
EdtechX has delivered several key operational developments
recently via SEC filings. One of the most important updates was
from a Forward Purchase Agreement with Azimut Enterprises, which
produced an aggregate investment of $20 million.
According to the agreement, Azimut agreed to
purchase up to 2,000,000 units of EDTX at $10.00 per unit, through
a private placement offering. At the end of February 2020, EdtechX
informed Azimut that they “would be required to purchase 2,000,000
units of EdtechX, for an aggregated investment of $20 million, upon
the closing of the business combination,” according to the SEC
filing.
Source: EDTX Investor Deck
EdtechX CEO, Benjamin Vedrenne-Cloquet, and Chairman, Charles
McIntyre, were recently interviewed in a news article published
by Alpha Week. In the article
published February 24, 2020, Alpha Week focuses on EdtechX’s merger
with Meten Education.
On March 9th, EdtechX was also mentioned in an
article from Financial News entitled
“What Kind of Business Does Well in China During a Quarantine?”
This is great for the company, as mainstream media is beginning to
pick up on EDTX’s story and potential.
New Investor Presentation Shows Company Trading At
Discount to Several Industry Averages
Meten EdtechX management also released an updated version of its
investor presentation, which now provides in-depth information on
Meten, the overall industry, and valuations. According to the
deck’s pro forma valuation and
outlook estimates, Meten EdtechX is trading at a discount to the
industry average for the Chinese education industry.
Source: EDTX Investor Deck
According to the company, Meten EdtechX’s enterprise
value-to-sales (EV/Sales) ratio is trading at an estimated 3 times
in 2019, 2.5 times in 2020, and 2.1 times in 2021. These estimates
are trading at discounts ranging from 60-68% compared to the
industry averages: average EV/Sales 2019E of 9.3x (68% discount),
2020E of 7.2x (65% discount), and 2021E of 5.2x (60% discount).
When isolating EV/Sales estimates for Meten’s online business,
the discounts to the industry average only continue to grow. The
average EV/Sales ratio for the industry estimated for 2019 comes in
at 16.5x (82% discount), 2020E is at 9.7x (74% discount), and 2021E
is 6x (66% discount). Meten’s EV/Sales discounts to industry
average between 2019-2021 range from 66% to 82%.
Source: EDTX Investor Deck
Valuation discounts to industry averages extend beyond just
EV/Sales. In 2020, Meten EdtechX sees its EV/Adjusted EBITDA coming
in at 19.6, with 2021 estimates set at 14.6. This compares to the
industry average EV/Adjusted EBITDA estimates of 54.4 in 2020 (64%
discount) and 33 in 2021 (56% discount).
Looking at Price/Adjusted Earnings, Meten EdtechX estimates 2020
multiple of 29 and 2021 estimates of 20.2. The average industry
estimates for 2020 and 2021 are less compelling: 2020 estimates of
158.8 (82% discount) and 2021 estimates of 49.4 (59% discount).
Peers and Coronavirus Performance
During the coronavirus outbreak, the average peer in China’s
online education industry has seen gains of almost 48%. This
includes companies like GSX
Techedu, Inc. (NYSE:
GSX), Youdao, Inc. (NYSE:
DAO), LAIX, Inc. (NYSE: LAIX), IDP (ASX: IEL), and Koolearn
(SEHK: 1797).
Source: EDTX Investor Deck
Omnichannel peers like TAL Education Group (NYSE:
TAL) and New Oriental Education & Technology Group (NYSE:
EDU), have seen average gains of 11.50% since the beginning of the
outbreak.
- GSX +92.68% YTD
- DAO +57.03%
- LAIX -3.50%
- IEL +2.02%
- Koolearn +65.68%
- EDTX +0.42%
- EDTXW +24.63%
Comparing EDTX’s common stock returns compared to online and
omnichannel peers highlights the potential opportunity, as the
underlying fundamentals of the industry show strength. The
company’s warrants have seen nice returns in recent weeks, which
makes them a potential compelling option as well for more
sophisticated investors that understand warrants.
Outlook & Estimates
Between 2016 and 2018, Meten saw its revenue grow at a compound
annual growth rate (CAGR) of 33.3% to 1.42 billion RMB (USD $199.3
million) in 2018. In the investor presentation, management provides
estimates and guidance for full-year 2019, 2020, and 2021
results.
Source: Meten EdtechX EDTX Investor Deck
Currently, EdtechX is forecasting full-year
2019 revenues to come in at $202 million USD, before growing to
$245 million USD in 2020 and $299 million USD in 2021. Between 2018
and 2021, this represents revenue CAGR of 14.50%. However, when
breaking down growth by online and offline, digital revenue growth
is projected to grow 37.80% between 2018 and 2021.
Bottom-line estimates for 2019-2021 are also flashing strong
growth. EdtechX estimates 2019 adjusted EBITA of $19 million USD
and adjusted net income of $9 million USD. For 2020, adjusted
EBITDA is estimated to come in at $31.14 million USD and adj. net
income at $22.4 million USD. In 2021, adj. EBITDA estimates grow to
$42.1 million USD and adj. net income of $32.2 million USD. Between
2018 and 2021, this represents adj. EBITDA CAGR of 27.8% and adj.
net income CAGR of 44.7%.
Source: Meten EdtechX EDTX Investor Deck
During a time when Chinese online education companies are seeing
big recognition, EdtechX looks like an appealing option for those
that may have missed the initial rally or are looking for value in
the space. The upcoming merger completion with Meten Education will
only further solidify the growth story, which is projecting strong
earnings growth over the next several years. Despite the strong
growth estimates and an overall fundamentally-sound industry
environment, EdtechX trades at steep discounts compared to its
peers’ average in the industry. For value and growth investors
alike, this is an interesting story beginning to unfold.
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