Wednesday, 15 January 2014 00:00

Treehouse Education and Accessories: A Potential Multibagger

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Disruptive Investor believes that Treehouse Education and Accessories is a potential long-term value creator. This article will discuss the reasons why we believe that our first stock pick is bound to be an outperformer.

Treehouse Education is in the business of pre-schools and is India’s largest self-operated pre-school chain. At a current market price of INR240, Treehouse Education is trading at a trailing twelve month PE of 22. We initiate on Treehouse Education with a target price of INR370, implying a 54% return with an 18 month time horizon. Before discussing our case, let me mention here that Treehouse Education has delivered a return of 77% since its IPO in August 2011.

 

Treehouse Education Pre-School

 

What Disruptive Investor likes about Treehouse Education

Passionate Management – A good management can deliver extraordinary results in an ordinary business and a bad management can underperform in a booming business. That’s the reason for looking at the management team before anything else. Rajesh Bhatia, who founded Treehouse Education in 2003, runs the business with passion. A half an hour interview with Rajesh Bhatia in the link provided will tell investors more on his way of conducting business. More evidences will follow as the investment positives unfold.

Owning The Business – All the major pre-schools in India operate on a franchisee model. Treehouse sets itself apart from everyone by being the largest self-operate pre-school chain in India. The reason: if the business model is great, why not own it completely. Also, owing the pre-schools standardizes the curriculum and this is a reflection of a management, which wants quality in education. As of September 2013, Treehouse Education had 426 pre-schools with 322 self-operated schools.

Growing The Business (through quality) – In the last two years, the company’s year on year revenue growth in same pre-schools has been 30%. This is an indication of brand pull rather than brand push. Treehouse centres now have classes in two shifts due to the growing demand. This has been achieved solely through quality and positive word of mouth. As Treehouse regularly upgrades the curriculum, same centre revenue growth will continue.

Growing The Business (Global Champs) – Treehouse Education acquired Global Champs from MT Educare in 2012/13. The company is now using this brand to target the urban poor. This is an excellent strategy as it opens a completely new revenue source and also brings pre-schools to the wider population. Treehouse is partnering with companies for opening pre-schools at their factory sites to provide quality education to the children of factory workers. While the management still has to disclose more on this, the initiative is progressive (for the company and society).

Growing The Business (Brainworks) – Treehouse Education also acquired Brainworks in 2013 as a part of their growth strategy. Treehouse intends to use this brand to expand into semi-urban and rural areas with limited or no access through concrete roads. Brainworks will be a franchise based pre-school and Treehouse intends to appoint 50-60 franchisee annually. This is another excellent strategy as it preserves the core brand name and also gives Treehouse access to rural India.

Boosting Returns (Going Asset Light) – In order to boost the ROCE and ROA, Treehouse intends to sell the land and building of four school complexes it owns. The book value of the assets is nearly INR75 crore. The sales proceeds will be used for growth and for retiring the INR66 crore debts. Going asset light will boost shareholder return in the future. It also underscores the management’s single focus on pre-school while it continues to garner management fees from schools. The asset sale should happen over the next six months and can potentially trigger upside in the stock.

The Five Year Plan – Treehouse Education aims to operate nearly 1,000 pre-schools over the next five years. This will be a combination of Treehouse, Global Champs and Brainworks brand. With nearly 50-60 children being born every minute in India, the demand for pre-schools will remain robust. Treehouse Education, with its high quality, is expected to capitalize on the growth.

Valuation Perspective – Treehouse Education has a diluted EPS of INR6.35 for the first half of the current year. The business model is simple as the revenue bump-up comes in the first quarter and the revenue remains steady for the next three quarters. Based on this, one can expect a full year EPS of INR12.7. The current stock price of INR240 would imply a PE of 19 for the year ended March 2014. Looking further, an EPS growth of 30% (relatively conservative), would imply a diluted EPS of INR16.5 for the year ended March 2015. If Treehouse trades at a PE of 22 in March 2015, the stock would be trading at INR370, which implies a 54% upside from current levels. We considered the current PE of 22 as a benchmark. It is conservative because an EPS growth of even 30% would mean that the PEG is less than 1. We are therefore giving a conservative target of 54% upside for the stock.

Conclusion – Treehouse Education is a good investment opportunity at current levels of INR240. The company has big plans going forward and the management has the conviction and passion to execute the plans. The intermediate target is just based on the expected financials over the next two years. However, investors can buy and hold the stock for long-term and multi-fold returns is a possibility.

Disclosure – Disruptive Investor has positions in Treehouse Education and plans to add to the positions at current levels

Disclaimer – The information provided is to the best of our understanding on the company and management. Investors are advised research on the points before considering exposure to the stock. Please visit the investor relation as it has lot of information.

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