Cedergrenska AB – A Tiny, Profitable, Cheap, Serial Acquirer

Cedergrenska is a tiny Swedish opportunity in Education with a very interesting 12 months ahead. This post will explain the set up.

Intro

That’s a lot of buzzwords. In the case of $CEDER.ST (I will refer to it as Ceder from now on) all these words are true. Ceder are a Swedish operator of education facilities from Kindergarten all the way to specialist adult education campuses. This will be a short overview post and I also recommend you read the below longer form write up which gives some great insights (and give him a follow if you don’t already). Full credit, the below write up is where I came across the idea.

Cedergrenska (CEDER) - A Fast-Growing, Best-in-Class Serial Acquirer Trading at a Double-Digit Earnings Yield

As always, I am an idiot on the internet, please do not take any of these writings as financial advice – you are responsible for your own financial decisions.

Background

In Sweden, there are both state schools and independent for-profit schools which get funding from the government on a per child basis to operate their schools. They then aim to eek out a decent margin from these grants which by its very nature is hard to do. It is pretty hard to operate a profitable school without either cutting corners on education quality or service quality such as school meals and facilities. It is the sort of business where scale is important. That is why Ceder is interesting. The company in short own 54 education facilities and are constantly working to acquire more with the aim to increase scale, share costs and therefore increase profits for the wider group. This is against a backdrop of many for profit schools being small operations, often of a couple schools. This means that Ceder are able to acquire schools for decent multiples of 5-8x but including cost savings, these multiples come down significantly. There is also an ongoing regulatory tailwind which we will expand on later which is depressing school multiples further which is providing a very interesting opportunity for the company to acquire schools cheaper. Investors buying into the company are buying into a non cyclical service industry with scale advantages over tiny individual operations. The question is if Ceder can stand up to this pressure themselves.

The Numbers

As mentioned, Ceder own 54 schools and employ over 1800 staff at their schools. In 24/25, Ceder grew revenue by 35.8% to 1,232.6 million SEK and generated net profits of 20.52 million SEK, an increase from 6.7 million the previous year. EBITA was 94.19 million SEK resulting in an EBITA margin of 7.6%, up from 6.2% the previous year. The company’s stated financial goals are the following,

- Over time to have 10-15% growth via organic and inorganic growth

- EBITA Margins between 6-8%

- Net Debt/EBITDA to not exceed 2x

- To pay out profits via dividend (1/3 of goodwill)

The company’s revenue has grown 113% over the last 5 years or 21% annually which is strong growth. EBITA growth is broadly in line with this, growing 22% annually in the same period. Pretty simple when there is a strong correlation between revenue and earnings growth. Net income has grown at a rate of around 8% - a function of the goodwill and amortisation from acquisitions. As long as Ceder keeps acquiring companies, this gap will continue to exist. Old schools who amortisation curve ends or reduces will be replaced by new schools keeping this effect fairly flat over time provided they continue to acquire.

All in all, this leaves us with a ‘real’ PE multiple of around 27 at the current market cap, but an EV/EBITA of only 7x. For a company generating around 15% ROIC and with guidance and a plan for strong growth to continue, this would be probably considered cheap on an EV/EBITA basis. But, as you know, all stocks must be bought forward looking. As this is a serial acquirer, we must consider its ability to grow its earnings, buy acquisition targets at good prices and continue to execute its business as it grows. Through this lens, things get even more interesting.

Forward Looking

The good news here is that the runway is on paper very long. The company state in their annual report that they are in the top 10 largest education providers in the country, but this market is still dominated by small operations of 1 or 2 schools. There are 837 independent schools in the country, and these serve varying percentages of the population depending on the age of students. For Upper high school grades (known as gymnasium), around 36% of students in Sweden attend an independent high school. Over half a million children are in preschool, 1 million students are in compulsory schooling and over 350 thousand are in upper high schools. Ceder’s target market is basically around 20% of the current Swedish population. Of the total 837 independent schools, Ceder has a market share of 6.45%. Just on a theoretical basis, its not hard to imagine a doubling or tripling of its market share. This is the sort of thing I want to see. There is no guarantee that Ceder will grow that much, but it is reasonable and undemanding to imagine this happening.

Ceder doubled revenue in 5 years and did the same with EBITA and there are no real barriers to this happening again in my view (bar regulatory issues which we will move on to). This would place the company at around 2400 million SEK in revenue and 188 million in EBITA with 41 million SEK in net profit. At current prices, this would be an EV/EBITA multiple of 3.5. The idea of a consistently growing non-cyclical education service business trading for 3.5 x EBITA seems a bit silly and I can’t imagine this would happen. At a more fair 10x multiple, Ceder would trade at a market cap of 1.9 Billion or 221% above its current market cap. At its current 7x multiple, it would be a 125% increase. For reasons we will move onto, its current 7x multiple is almost certainly depressed by regulatory factors and therefore if things pan out well, a rerating to 10x at the least is a very conservative assumption. All these figures exclude continued synergies, increasing scale and declining multiples for acquisitions which I feel is also a potential outcome as a result of recent developments increasing upside.

The Elephant in the Classroom

It might sound fairly positive so far but I regret to inform you there is a catch. And its one that will put off many and not bother others so much. I will leave you to judge where you stand.

Independent schools in Sweden have fallen under some scrutiny in recent years from both the ruling right coalition parties and the opposition left party but for very different reasons. An election is also due to be held in the fall so it is worth understanding both views. The 2 main issues facing Ceder are the following,

The Right Wing Ruling Coalition – Concerns about the quality of education in independent run schools – As it is hard to run a profitable school with good education quality (especially at small scale), the government, currently run by SD (Sweden Democrats) have moved to stop corner cutting from bad operators who have made compromises in favour of profit. They plan to introduce regulation which limits how quickly owners of schools can take money out of the school – potentially as long as 5 years in order to deter bad operators.

The Opposition Left Party – The Left Party (Known as S - Social Democrats) are opposed to the operation of independent schools and want all schools to be state run and have made this one of their election promises. If they got their way, Ceder’s schools would no longer have a business and would be state run.

Starting with the more serious issue, if the Left Party come into power, are shareholders going to lose everything? Once again, I strongly encourage you to read the Oracle of Oslo’s article on the company. In his evaluation of this risk, he states the following,

‘Sweden is not China. Any forced wind-down would have to happen within a democratic framework that binds the government’s hands: EU property rights protections, legal challenges that well-funded operators would definitely pursue, and politicians who actually have to answer for what they do with public money….Should the Swedish government pursue a ban, operators like CEDER wouldn’t simply fold, the schools don’t disappear, and the 400k+ pupils and teachers inside them still show up to school on Monday morning. A government that lets operators wind down would be leaving hundreds of thousands of students without schools, which is its own political catastrophe. So they would be forced to seize the assets to keep schools running, at which point Article 17 kicks in and fair compensation becomes a legal obligation.’

He also makes the point that the Left Party would have to explain to voters why it is spending their money to buy schools which are already running using government funding and this would very likely be unpopular given the other issues the country is facing. In theory, the party could employ a more gradual phase-out, preventing independent schools from taking on new students going forward to get around Article 17 but you are still going to face strong legal challenges and again, the hassle does not seem worth the trouble. Investors are likely spooked as the S are leading the polls by some margin and expected to form a government. I am not an expert in Swedish politics, but it seems like a fools errand to change a system that is currently working. Despite this, there is clearly concern in the industry, evidenced by the reduced multiples by which Ceder are currently able to acquire new schools compared with before this current election cycle. Where they were buying schools at around 5-8x EBITDA, schools are now selling themselves for closer to 3-4x.

In my opinion, the more serious risk is not a total ban and changing the status of independent schools to non profits, but rather measures which slowly erode the viability of the business such as preventing independent schools from taking on new students, profit caps or forcing them to return funds from the vouchers given per student which go unspent. These changes in theory could circumvent triggering large scale lawsuits which would be very costly for the government. As far back as 2010, the challenging S party opposed independent schools and since then there have been several attempts to ban them, the most serious of which resulted in a failed vote in 2018. This is worth mentioning in the context of the fact that the independent school model is completely unique to Sweden in the Nordics and has survived since it was first introduced in 1992. Since then, several different parties have been part of coalition governments and the system has stayed in place. Obviously the past cannot ensure the future will remain the same, but it is worth mentioning that the system has been challenged before and has outlived those challenges.

Now, if the right wing parties remain in government, Ceder’s primary issue is basically the annoyance of not being able to move money freely between schools. The company remain confident that they provide a good standard of education and that no changes to their estimates will need to be made to factor in potential extra demand to meet currently scheduled regulation changes being introduced by the current SD government. I spoke to a member of the company’s management regarding both the current regulatory changes proposed and about anything more serious that may come along.

I asked if they shared the view that more drastic changes would be unlikely due to either S (the left party) not winning the election or not following through on their promise due to the potential costs involved with a total ban on for profit schools. They were in agreement.

How you choose to take this very much depends on your mindset. You can either see it as a company who’s management are very involved in the current debate around the ban, experienced with previous situations and also the potential routes that the government could take that would affect them and have concluded that the impact on their business is minimal. Or you could take this as a management team being dismissive of a very real and serious risk to their future. I have not exactly made up my mind on what I think. But, they are not lacking confidence they are on the right side, that is for sure.

In terms of less strict regulation mainly around cash movements between owned schools, they had this to say

‘With the current proposed changes… everything points to 3 scenarios. 1)When acquiring a school, there is a 5 year restriction. 2)When starting a new school from scratch [there is a 5 year restriction on moving cash out] 3) When there is a serious breach of quality in the management of a school, likely a 3 year restriction. Don’t forget that it is still possible to borrow money from affected entities within the group, as long as it is done at market pricing. Liquidity will not be affected, only the short term allocation of the equity.’

This gives some certainty around how Ceder would cope under the current new proposals. If anything, these would be advantageous to them as a scale player without issues in school quality. In terms of the current cheap valuation, they were of the view that this is down to Swedish investors being unaware of their story due to the perceived uncertainty in the sector and the fact they are a very small company. So long as there is this perceived political risk, they will remain suppressed.

Management

The key man here is Niklas Palsson who is the former CEO and now board member holding a very significant share in the company at around 17% of shares outstanding. His voice is therefore very significant in the direction of the company. During the last election in 2022, he made the following comments.

‘The biggest challenge is the same for all education groups, which is the political risk during an election year, which is also reflected in the share price. A reduced school fee affects our growth at the same time that we need clear political frameworks to be able to make more long-term decisions, which could be with property developers, for example. Today there is a risk that these frameworks will change. On the other hand, we know that we are needed, which is also confirmed by the municipalities. Today we have a very good collaboration with the municipalities and other stakeholders in the municipalities we operate in, which gives us a stable position to continue developing Cedergrenska.’

Niklas here seems to be highlighting the fact that there is a demand for education and specifically for their independent schools. Even in the face of political risks, it would be very hard to limit the ability for schools to take on new students without backlash from parents and municipalities. There is a subtle dynamic at play here where Ceder - at least at the time of the last election - seem to display a quiet confidence that they are in a stronger position of negotiation than they might at first appear to be.

Final thoughts

Full disclosure, I currently DO NOT own any shares of Ceder. I would welcome any current shareholders reaching out to share their views on the situation. The set up to me, without the political risk, is great for a serial acquirer. I just don’t know how things are going to change over the coming months and years. I may choose to size a small position, I may choose to just avoid it entirely until there is more certainty around regulation going forward.

As always thank you for reading and your continued interest in my writings. I have quite a few research projects ongoing so please consider subscribing to keep up to date on these.

And please remember that none of my writings should be taken as financial advice.