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Date : 23/06/2021

Readcloud Limited

ASX :

RCL

Market Cap : $44.36 Million

Buy

52 Week Range : $0.26 - $0.85

Share Price : $0.36

The combination of solid revenue growth, a high rate of user acquisition, and a buoyant sector make ReadCloud a massive opportunity. A "Buy" from us.

Company Analysis

ReadCloud Ltd (ASX: RCL) engages in the provision of digital eLearning solutions to Australian secondary schools. It operates through the following segments: eBook Solutions and Vocational Education and Training. The eBook Solutions segment provides eBook solutions to secondary schools across Australia. The Vocational Education and Training segment provides Vocational Education and Training courses and services.

ReadCloud was founded in 2009 and debuted on the ASX in early 2018, initially raising $6 million at 20 cents per share through its initial public offering. Today, ReadCloud is trading around 37 cents per share, representing nearly a 23% CAGR in a little more than three years. At their peak, the shares reached 84.5 cents not so long ago during the end of the first half of FY21 before moving back to their average price of 40 cents a share.

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Today, ReadCloud is leading the eReading solution in Australia, delivering curriculum eBooks to schools and to the Vocational Education and Training (VET) sector. RCL provides more than two hundred thousand eBooks from the World’s leading publisher.

ReadCloud not just another “eReader”

ReadCloud is not just another simple eBook platform. It is a completely new concept that embraces an industry that is on the verge of a paradigm shift from content delivery to interactive learning. ReadCloud via its eBook platform delivers digital content to students and teachers with extensive functionality to enhance interaction between students and teachers by letting all users share notes, post comments, ask questions, and also illustrate content with videos and web link inside the eBooks turning the content into a place for discussion, collaboration and social learning. Essentially, all things that would have made our lives in school just that much easier!

ReadCloud is also well-established in Australia and is currently providing the nationwide school curriculum in digital form. The platform is expanding rapidly and has now more than a hundred thousand users.

A well-structured business in the booming EdTech industry

ReadCloud’s ability to turn a simple static eReader into an EdTech powerhouse that currently serves two promising growth markets which are schools and Vocational Education and Training courses (VET) is extremely innovative . The revenue model is just like most technology companies with a focus on recurring revenues. It has the potential to fuel future growth with income generated by issuing licenses to use the ReadCloud platform. Schools and universities must obtain a license to get access to over two hundred thousand eBooks from major publishers. It is worth noting that the licence does not cover the cost of the content. eBooks need to be purchased by schools on top of the license fee.

In fact, eBook sales are another revenue driver which generated $2.4 million during the first half of FY21 out of $3.5 million of the total revenue. This represented a large chunk of 67% of the total income. The revenue model developed by ReadCloud is convincing and would play well in the long-run. We like the idea of having a base revenue derived from licenses while collecting eBook sales. In our opinion, that is a receipt for success considering the high prospective growth of the emerging EdTech industry.

Company Updates

We are convinced that ReadCloud can grow along with this burgeoning sector. The company has shown us that they are capable of executing their idea through a reliable and innovative product. FY22 for ReadCloud also looks to be the year the business turns profitable. During the first half, ReadCloud saw its school revenue segment generate $3.1 million, an improvement by just 6% year-over-year. The reason for the limited increase was due to publisher discounts in support of COVID-19 relief and schools postponing their orders to the second half of the year. Hence, we are anticipating a strong rebound throughout 2HFY21.

Also, in the meantime, ReadCloud did expand its offering with full-curriculum school users that grew by 21.7% year-on-year to 56 thousand. The other ReadCloud’s business segment is the lucrative VET division. VET segment is a relatively new product that started to bring some revenue during the second half of FY19. Sales grew by 58% year-on-year during the first half of FY21. That is quite an impressive performance as we should consider that when it comes to the VET business segment, most of the revenue is received during the second half of the year due to the period of invoicing. If we look back at FY20, 90% of the VET segment’s annual revenue was produced during the second half of the financial year. With that in mind, we could expect solid results for the second half of the year.

A lot of improvements in the pipeline

ReadCloud is moving as fast as the EdTech sector expands. The company continues to invest in its platform to improve its user experience and ultimately reach “product market fit”. Another promising feature is the recently rolled out sales quoting and ordering system for direct full-curriculum schools. This new feature is a big enhancement that will allow the scalability of the business. ReadCloud did progress a lot as well on its VET segment and is working on an advanced functionality to ease the onboarding process. The release of this feature is expected for 2022.

Key Acquisition to further expand the VET business segment

Last year in November, ReadCloud announced that it has taken over the market leader in the VET courses for the music industry COSAMP (PKY Media Pty Ltd.). COSAMP is one of the top ten vertically integrated VET-in-School’s sectors. This acquisition is a big move for ReadCloud and expands the company’s reach in the VET market. From this buyout, ReadCloud is taking over five hundred school customers, a 40% increase to its VET client base.

FY21 Outlook: ReadCloud exhibits a solid foundation to support its strong growth

ReadCloud has stated its intention to continue to accelerate its growth following its strategic plan to develop both its business segments, full-curriculum schools and VET-in-schools markets. The company plans to strengthen its position in the full-curriculum schools’ segment by increasing its investment in direct selling and marketing. ReadCloud is also looking to invest further in its VET-in-schools segment. The capital injection will help to develop driving internal operational efficiencies, enhancing delivery processes and cross-selling as well as the development and continuous improvement of course material content. We remain confident that the second half of the year will be a strong one as ReadCloud exhibits a solid sales pipeline and also presents margin improvements with growth opportunities. Furthermore, the firm is expecting additional acquisitions to further support its VET business segment expansion. We believe ReadCloud is well placed for strong growth leading into the selling season for the 2022 school year given the increased interest and focus on digital education solutions and the increase in ReadCloud investment to exploit these opportunities.

Industry Analysis

As the coronavirus has been impacting the world profoundly and has forced businesses to entirely review the way they are operating, it also created new opportunities, new business ideas and disrupted a few industries. It has been no exception for the education sector, and COVID-19 has fuelled and accelerated the Australian education sector. We think that the industry is starting to get significant tailwinds as an investment thematic and that investors should get ready to position themselves for the upcoming revolution in education technology.

Online learning is becoming mainstream

COVID-19 has changed the way we live. Lockdowns and social distancing forced schools and universities to accelerate their transition to the online learning platform. It has been a long time coming, but most of the students in Australia can now study entirely online. Like so much other technological change, the pandemic has condensed years of change in online learning into months, giving educators and students a crash course in this area. We believe that the development of the eLearning platform will continue to speed up not just as a by-product of COVID-19, but as a new way to deliver knowledge. The potential is huge and online learning is changing the face of the traditional education sector toward a more digitised and effective approach. The EdTech market is likely to witness a 110% growth by the end of FY26. We begin to see a paradigm shift in the sector, from content delivery to interactive learning platforms, and that is where ReadCloud is positioning.

As we already know, Australia is one of the leading destinations for the quality of its education system. We would assume that it is not a big jump as the country has all it takes to build education technology solutions and export the concept globally. In fact, there is tremendous investment in the EdTech industry. Venture capital firms bet more than $13 billion last year, compared to $665 million ten years ago. Some estimates project an additional $116 billion worth of investments over the next decade with an anticipated global market to be valued at $173 billion by 2025.

We have started to see some dynamics playing out in the local market recently with a few Australian companies launching their products globally amid explosive growth. To put things into context, China is the biggest player in this field for now with up to 53% of the EdTech market in the world. The U.S. claims 33% of the global market share, whilst the rest of the world, comprising Australia, represents just 5%. Needless to say that Australia is still in its early stage and has all the talents and resources to conquer the global EdTech market. The concept of online education was already growing at a fast pace before COVID-19 happened, but things accelerated massively during the pandemic. We saw a boom in the sector.

Investment Thesis

ReadCloud to achieve profitability by early FY22

The firm has shown some solid user growth throughout the first half of FY21. As of February 2021, ReadCloud accounts for 117 thousand users on its platform and that is nearly 14% growth year-on-year. We are forecasting a significant increase in users for the second half of this year with the planned acquisition in the VET sector. We think that ReadCloud is well-placed to continue to expand. The company has a strong balance sheet of $7 million in cash and no debt at all. That gives ReadCloud full potential to continue its expansion through targeted acquisitions and increased business development activities. We also see strong momentum in new school customer acquisitions in both business segments, full-curriculum, and VET. All in all, we can expect a strong performance onward FY21 driven by favourable market conditions.

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Source: ReadCloud

We see in ReadCloud massive potential for growth and most importantly, the possibility for the company to reach the positive territory by the end of FY21 or by early FY22. Their platform creates a win-win situation among ReadCloud, schools and students. ReadCloud platform delivers evident educational benefits and helps schools and students to save money by offering an efficient approach to teaching and learning. Since the last 3-year period, the company has increased its users base tremendously at a rate of 80%. At that pace, ReadCloud can quickly become a mainstream product in Australia which is a large market opportunity with an immediate target market of 2,775 secondary schools and 1.6 million students. Furthermore, 236 thousand students annually are taking VET courses in schools. One key element we really like in ReadCloud is that its platform is highly scalable which is leveraged to improve operating margins as courses and the number of users grows. Conservatively at the current rate, we are projecting a revenue CAGR of 19.8% over the next five years while the cost of revenue is likely to remain stable leading to an improved gross profit. The earnings margin is expected to stay consistent with the revenue to expense ratio.

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Forecast and valuation

Comparing ReadCloud to its peers, onward FY23, the company appears to have all the traits of a successful and profitable business. We expect ReadCloud to be better positioned than its competitors (such as 3P Learning, OpenLearning, and Schrole Group) with a positive FY23 P/E ratio at 53.6x while most of its peers do not look like reaching profitability any time soon. One peer we have already reported on and stay quite bullish on is Janison Education. The share price performance has been recently in a wild ride. We think that ReadCloud deserves more attention, the company exhibits terrific fundamentals, a rock-solid balance sheet with literally no debt and abundant cash for further strategic acquisitions. Looking at ReadCloud multiples, we can see that there is plenty of room for the share price to skyrocket. EV/EBITDA is expected to turn positive by early FY22 based on our revenues and earnings estimates. Also, the revenue CAGR of 19.8% for the next 5-year period with a stable EBITDA margin gives us confidence in ReadCloud. The combination of consistent revenue growth, a high rate of users’ acquisition and a buoyant sector make ReadCloud an opportunity not to not miss.

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Technical Analysis

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Trend

It has been quite a wild ride for ReadCloud since its IPO. The company’s share went from peak to valley and thus exhibiting this same price action year-on-year. During the first year following its IPO, RCL spiked all the way up to 62 cents per share before heading back to an all-time low at 22.5 cents in just a few months. When we observe ReadCloud historical prices, we can see that since RCL inception, the price equilibrium revolves around 35 cents per share which coincide with the 78.6% Fibonacci level of the COVID-19 swing high. According to the historical price pattern of RCL, we can confidently assume that the 35 cents per share level is a good candidate for a buy entry as this price zone exhibits strong support. Furthermore, if we look at the weekly chart, the relative strength index suggests that RCL is currently oversold.

Key price levels

There are two important levels to watch. The first one is the support level at 35 cents which offer a fair price for a buying opportunity. On the upside, the 46 cents per share might pose a challenge to RCL. Significant resistance might force ReadCloud share price to consolidate at that level. Once a clear breakout occurs above the 46 and 50 cents price zone, RCL will be then able to challenge its all-time high at 85 cents per share.

Volume and momentum

Volume decreases since the last 200-day with the 20-day volume average down by -44%. The price action remains neutral in the near term, evolving in a range between 35 cents and 43 cents per share.

Trade consideration

  • Market participants might be interested to enter at key support levels: 35 cents and 30 cents.
  • Primary target price above 62 cents per share
  • Secondary target price at 84 cents per share
  • Consider reducing exposure below 27 cents
  • It is recommended exiting the trade below 25 cents

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Recommendation

We are issuing a “Buy” recommendation for ReadCloud. We think that the company deserves more attention. Also, ReadCloud is not just another eBook platform, it is much more than that. The company has developed a whole new level of eLearning concept that embraces an industry that is being revolutionised. Readcloud currently serves two promising growth markets – Schools and Vocational Education and Training courses (VET). The revenue model is unique and the potential of the recurring stream of income generated by licenses to use the platform adds stability. ReadCloud is also well-established in Australia and is currently providing the nationwide school curriculum in digital form. The company exhibits terrific fundamentals, a rock-solid balance sheet with literally no debt and abundant cash for further strategic acquisitions. The combination of solid revenue growth, a high rate of users’ acquisition and a buoyant sector make ReadCloud a massive opportunity.

 

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