After reading through the prospectus I noticed a strange forecast in the employee expenses
As stated in the prospectus, Employee expense has grown from 17m in FY11 to 21.2m in FY13. At 21.2m it takes out 66% of revenue earned. Given that they do 'Research and Development' in India...you can imagine that the cost to develop and maintain this software has to be small (side note...i cannot imagine that the software needed to educate Kindergarten kids would be terribly complex) which leaves a possibly disproportionate amount of expense being paid to other employees. Following on from the historical Employee expense they forecast that employee costs will go down and by almost 30% in FY14 to 14.9m. It would be great for shareholders, don't get me wrong, but it seems strange, that a newly publicly listed company, who is trying to expand globally, is at the very same time able to cut 30% of the employee expenses. Something doesn't seem right here.
I also noticed that 15% of revenue is generated from 'Reading Eggs'. That's $4.8m of $32m. Yet tucked away in the foot notes we see the following comments relating to this
"3P does not own the intellectual property rights to Reading Eggs and Reading Eggspress. 3P has a sales agency agreement to sell there products..." Futher along it says "3P does not have rights to distribute Reading Eggs or Reading Eggspress in the United States, China, Korea and some other territories, which will impact on 3P's product range in these territories."
Lucky the US, China and Korea are small markets!!!
A little further on, is this "3P's ability to cross-sell its products is constrained by the Blake Group's ownership of Reading Eggs and Reading Eggpress, which may adversely impact on the value of the Company."
15% of revenue is derived from this product that they are greatly restricted in selling. This is fine, however one must consider the possibility that at some point in the future, the rights to sell this product may be terminated, similar to what has recently happened to NVT where a large portion of revenue has vanished on the back of a decision by Macquarie University. These sort of contractual agreements over revenue generally warrant a discount on the valuation and yet 3P is trading at a very high PE.
What do people think about the financials and business model in general?
TPN Price at posting:
$2.30 Sentiment: Sell Disclosure: Not Held
