NOAH EDUCATION HOLDINGS -ADR NED
March 01, 2010 - 4:56pm EST by
Bill
2010 2011
Price: 4.45 EPS $0.38 $0.49
Shares Out. (in M): 39 P/E 11.0x 8.9x
Market Cap (in $M): 174 P/FCF 11.0x (adjusted) 9.0x
Net Debt (in $M): -116 EBIT 10 13
TEV ($): 52 TEV/EBIT 5.5x 4.0x

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Description

NOAH EDUCATION HOLDINGS (NED) - AN INCREDIBLY CHEAP STOCK WITH MULTIPLE CATALYSTS

Thesis: In my view NED is the best way to play growth in China's education market at a dirt cheap valuation. I estimate NED is at least 65%-120% undervalued at present with 300% longer-term upside potential in a reasonable best case scenario, and with very little fundamental downside. I believe that there is a vast imperfection in NED stock that has primarily been caused buy a lack of research coverage on the company, and as the market begins to recognize the NED's growth and value story the stock will move up meaningfully.

The Company: NED is a Chinese based education company that derives its revenues primarily through the sale of Electronic Learning Products (ELPs) for kids aged 3-19 in China. The company offers a range of sophisticated electronic learning products including hand-held digital learning devices (DLDs), kids learning devices (KLDs), and e-dictionaries. Most of these products are integrated with the companies in-house developed proprietary software. Through the company's 6/6/09 acquisition of Little New Star (LNS) NED also offers education services through a network of 700 schools, primarily focused on english language training. NED is among the most dominant players in all of its target markets which I estimate will grow on average at 15-20% annually over the next three years.

Valuation: Using any reasonable valuation technique I believe NED is substantially undervalued. NED has $116 million ($3.05 per share) of net cash versus the current stock price of $4.45. Therfore, 68.5% of the company's valuation is attributable to the company's cash alone. On my CY10 estimates the stock is valued at a P/E, EV/EBITDA and FCF yield of 8.9x, 2.7x and 11%. Using a combination of fair valuation techniques, I calculate the stock is undervalued at present by anywhere between 65-120% with a target price of $7.35-$9.80, and substancial upside potential above this range over the longer-term if the company continues to perform as I expect.  My target price assumes the stock should be valued at a CY10 P/E of 15-20x, or an EV/EBITDA of 8-10x, which I think is reasonable based on a DCF analysis and in-line with some comparable companies.  

Recent Results: On 2/11/10 NED reported 2Q10 results which demonstrated net revenue growh of 14.5% and EPS growh of 62%, driven by a combination of organic and acquisition driven growth. Organic net revenues grew by 10.2% on a YOY basis, driven by 36% and 25% growth in the company's KLD and e-dictionary product lines, partially offset by a 6% decline in DLD products. The company's acquired LNS segment contributed the remaining growth. NED issued 3Q10 guidance calling for YOY organic revenue growth of about 35%, and in the range of $41.3-$42.9M. NED also expects 3Q10 EPS growth around 28% to a level of $0.17-$0.19. For FY10 NED expects revenue and EPS growth of around 31% and 20%. The company expects FY10 EPS of $0.44-$0.47. However, I think the company's forecasts are conservative given recent growth trends and the potential for accreative aquisitions which are not factored into estimates. 

Recent Events: The stock has been under signficant pressure over the last four months, down about 27% from its recent high. In my view the weakness was primarily driven by selling from the NED's largest shareholder Lehman Brothers who owned 7.12% of the company, and has been liquidating their holdings for financial reasons. However, the Lehman position was recently cleaned-out on 2/25/10 by a block sale which NED arranged where the company repurchased 654k shares from Lehman at $4 per share, and a group of private investors repurchased the remaining 1.274M shares at $4 per share. With the Lehman overhang eliminated, and the company's strong 2Q EPS results, I think the stock is poised for both a trading rebound and a fundamental move. 

 

Catalyst

1) Some of the more powerful catalysts have recently occured including the company's strong 2Q results, and Lehman being cleaned-out of the stock. However, I don't believe the stock has yet reflected the magnitude of these events because there is a lack of interest in the stock at present and not that many investors are aware of the NED story. I think As the market absorbs the recent events the stock will rise.

2) I expect the company to deploy a signifcant portion of its cash hoard and FCF to either accreative aquisitions and/or share repurchases or buybacks, any combination of which could signfincantly move the stock up.

3) My estimates indicate the company is being conservative with guidance and I thus expect the company to post 3Q10 and FY10 results ahead of managements guidance.

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    Description

    NOAH EDUCATION HOLDINGS (NED) - AN INCREDIBLY CHEAP STOCK WITH MULTIPLE CATALYSTS

    Thesis: In my view NED is the best way to play growth in China's education market at a dirt cheap valuation. I estimate NED is at least 65%-120% undervalued at present with 300% longer-term upside potential in a reasonable best case scenario, and with very little fundamental downside. I believe that there is a vast imperfection in NED stock that has primarily been caused buy a lack of research coverage on the company, and as the market begins to recognize the NED's growth and value story the stock will move up meaningfully.

    The Company: NED is a Chinese based education company that derives its revenues primarily through the sale of Electronic Learning Products (ELPs) for kids aged 3-19 in China. The company offers a range of sophisticated electronic learning products including hand-held digital learning devices (DLDs), kids learning devices (KLDs), and e-dictionaries. Most of these products are integrated with the companies in-house developed proprietary software. Through the company's 6/6/09 acquisition of Little New Star (LNS) NED also offers education services through a network of 700 schools, primarily focused on english language training. NED is among the most dominant players in all of its target markets which I estimate will grow on average at 15-20% annually over the next three years.

    Valuation: Using any reasonable valuation technique I believe NED is substantially undervalued. NED has $116 million ($3.05 per share) of net cash versus the current stock price of $4.45. Therfore, 68.5% of the company's valuation is attributable to the company's cash alone. On my CY10 estimates the stock is valued at a P/E, EV/EBITDA and FCF yield of 8.9x, 2.7x and 11%. Using a combination of fair valuation techniques, I calculate the stock is undervalued at present by anywhere between 65-120% with a target price of $7.35-$9.80, and substancial upside potential above this range over the longer-term if the company continues to perform as I expect.  My target price assumes the stock should be valued at a CY10 P/E of 15-20x, or an EV/EBITDA of 8-10x, which I think is reasonable based on a DCF analysis and in-line with some comparable companies.  

    Recent Results: On 2/11/10 NED reported 2Q10 results which demonstrated net revenue growh of 14.5% and EPS growh of 62%, driven by a combination of organic and acquisition driven growth. Organic net revenues grew by 10.2% on a YOY basis, driven by 36% and 25% growth in the company's KLD and e-dictionary product lines, partially offset by a 6% decline in DLD products. The company's acquired LNS segment contributed the remaining growth. NED issued 3Q10 guidance calling for YOY organic revenue growth of about 35%, and in the range of $41.3-$42.9M. NED also expects 3Q10 EPS growth around 28% to a level of $0.17-$0.19. For FY10 NED expects revenue and EPS growth of around 31% and 20%. The company expects FY10 EPS of $0.44-$0.47. However, I think the company's forecasts are conservative given recent growth trends and the potential for accreative aquisitions which are not factored into estimates. 

    Recent Events: The stock has been under signficant pressure over the last four months, down about 27% from its recent high. In my view the weakness was primarily driven by selling from the NED's largest shareholder Lehman Brothers who owned 7.12% of the company, and has been liquidating their holdings for financial reasons. However, the Lehman position was recently cleaned-out on 2/25/10 by a block sale which NED arranged where the company repurchased 654k shares from Lehman at $4 per share, and a group of private investors repurchased the remaining 1.274M shares at $4 per share. With the Lehman overhang eliminated, and the company's strong 2Q EPS results, I think the stock is poised for both a trading rebound and a fundamental move. 

     

    Catalyst

    1) Some of the more powerful catalysts have recently occured including the company's strong 2Q results, and Lehman being cleaned-out of the stock. However, I don't believe the stock has yet reflected the magnitude of these events because there is a lack of interest in the stock at present and not that many investors are aware of the NED story. I think As the market absorbs the recent events the stock will rise.

    2) I expect the company to deploy a signifcant portion of its cash hoard and FCF to either accreative aquisitions and/or share repurchases or buybacks, any combination of which could signfincantly move the stock up.

    3) My estimates indicate the company is being conservative with guidance and I thus expect the company to post 3Q10 and FY10 results ahead of managements guidance.

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