Nord Anglia Education Inc. (NORD, Financial) is the world's leading operator of premium schools, teaching children from kindergarten through the end of secondary school. Nord operates 27 premium schools all over the globe and has over 17,000 students enrolled. They teach the English National Curriculum primarily to the children of expatriates whose employers provide premium schooling to their top executives. Though the schools have been around for decades, the company just came public in March, and we invested in its initial public offering and in the aftermarket.
We find a lot to like with the business. The schools have great reputations. Education is so important to the parents that they easily attract students in all economic climates. Students stay an average of 3 1 â„ 2 years, leading to great revenue visibility. Nord has been able to raise tuition 4-6% per year without issue. New school construction and expansions to existing schools are usually done on a real estate developer's balance sheet, and this capital- light approach results in high returns on capital. The business earns very high margins and free cash flow has been used to repay debt and acquire other like schools, which Nord has been successful in integrating, improving margins and growing.
We foresee lots of growth. The plan is for the company to grow its student count by about 10% per year at its present schools, by filling up the additional capacity they add each year and raise prices about 5% per year. This will be supplemented by high return greenfield construction of new schools (three are in the works: in Hong Kong, Dubai and Chicago). The company also plans to spend $50 million plus per year on acquisitions, which are purchased on very accretive terms and grown from there. We think the business and growth profile will command a nice double digit multiple of cash flow and /or over a twenty multiple of earnings. We believe this investment can be a winner over the short and long terms.
From Baron Funds' first quarter 2014 commentary.
