A COMPANY TO WATCH – EDUCATION DEVELOPMENT INTERNATIONAL

A COMPANY TO WATCH – EDUCATION DEVELOPMENT INTERNATIONAL

We featured EDD as a company tyo watch some months ago and today’s AGM statement shows EDI performing even better than expected - no mean feat in today’s depressed market conditions. What is particularly pleasing about the statement is that progress is being recorded in all areas of the business, with both revenues and profits moving ahead strongly. The group is now beginning to see the real benefits of the restructuring programme which began in 2004 and the subsequent expansion of the business as the effects of operational gearing kick in. In addition, the significant operating cash flow at the group means that it has a very strong balance sheet and this should provide further comfort for investors going forward. Pre-tax profits in  the current financial year will not only benefit from favourable exchange rate movements but also from the introduction of new legislation requiring taxi drivers to obtain a suitable qualification. This has provided the company with very profitable short-term demand and this helps to explain the significant increase in pre-tax profits for 2009.

FINANCIAL/TRADING
Last year’s annual results to 30 September saw revenue on continuing operations increase by 34% to £21.5m (2007: £16.1m) and pre-tax profits before amortisation of acquired intangible assets rise by 58% to £3.34m (2007: £2.11m). Adjusted earnings per share were 6.2p (2007: 4.1p) and the dividend was raised to 0.42p (2007: 0.33p). Strong operating cash flow meant that net cash at the year end was £3.23m (2007: £3.05m) and this was after spending £3.73m during the year on acquisitions, dividend payments, the purchase of 1m shares for the Employee Benefit Trust and a payment of £325,000 in relations to a dilapidations settlement.
The trading statement at today’s AGM has confirmed that in the first three months of the group’s financial year profitability has exceeded expectations with revenue significantly ahead of the previous year on a like-for-like basis. This is partly due to exchange rate gains against both the Euro and US Dollar, whilst the growth in profits has been helped by tight cost control resulting in lower than expected expenditure in the period. Strong growth was seen in the sales of vocational qualification services in the UK, whilst although sales volumes of international qualifications were at similar levels to the same period in 2007, revenues increased due to exchange rate gains. The introduction of a new UK road passenger transport qualification has also seen exceptionally strong initial demand during the quarter. In addition, the group has also won a large new contract with a private training provider of vocational qualifications and the benefits of this should be seen in the second half and beyond.

ACTIVITIES

EDI is a leading provider of accredited qualifications and assessment services and it also provides IT-based back office administration support services both internally and to third party clients. It operates through three business segments:
i) UK Qualifications and Assessment Services (55% of FY2008 turnover) - This provides a range of around 320 nationally accredited vocational qualifications and it has over 200,000 candidate registrations per annum who are assessed at one of almost 1,900 registered centres. Only City & Guilds has a greater market share in terms of government funded programmes. The acquisitions last year of ASET and eNVQ increased both the range of services and its customer base whilst offering scope for cross selling.
ii) International Qualifications (27% of FY2008 turnover) - EDI has an exclusive licence to use the London Chamber of Commerce and Industry (LCCI) brand, which is seen as a mark of competence, especially in Commonwealth countries. Its key markets are Asia, where the focus is on finance, and Europe, where English language qualifications are most popular as there is growing global demand for English language skills, particularly in new EU member states. The business offers 65 examinations under the LCCI brand and it has 4,530 registered exam centres in over 100 countries. The management team has recently been strengthened as the business continues to grow. Recent weakness in Sterling has been beneficial.
iii) Support and Internet Services (17% of FY2008 turnover) - This includes online testing platforms, qualifications and learner administration systems, printing, logistics and the provision of internet services through its 75% owned subsidiary Fusion Media.

PROSPECTS
There is no doubt that the new financial year has started very strongly, with both revenue and profits being enhanced by the short term demand for the new UK road passenger transport qualification and the weakening of sterling. In addition, some expenditure which had been planned for the first half is likely to fall into the second half of the financial year, leading to very strong first half figures when the interims are announced in June. The group started the financial year with net cash of £3.23m and, given the fact that it is strongly cash generative and there is little in the way of capital expenditure planned, the year end cash balance for September 2009 is likely to rise substantially. This not only provides reassurance for investors, but also gives the group significant scope to make acquisitions if suitable opportunities arise. The group is clearly aware of the downturn in the world economy, but so far its business appears to have been unaffected directly by this. In the core UK vocational qualifications market, the government has recently announced further funding for employee training and apprenticeship programmes and EDI, with its growing market share, should benefit from this. The International business is clearly benefiting from the weakness in sterling and the sales team in this part of the business has also been strengthened. The support services operation has a large amount of repeat business although it is also winning new orders on higher margins. The group operates in a growing market and is steadily increasing market share - it has a strong balance sheet, an experienced management team and yet the shares only stand on a miserly rating.

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