Embark Early Education flagged as “Strong Buy” despite modest ROE

Embark Early Education Limited (ASX:EVO) has been labelled a “Strong Buy” by analysts, with its robust earnings growth and high dividend yield offsetting concerns over its modest return on equity (ROE).

EVO reported an ROE of 9.5% for the 12 months to December 2024, slightly above the industry average of 8.2%. While unremarkable on the surface, the company’s underlying performance tells a more promising story. EVO’s net income has grown by 62.7% annually over the past five years, significantly outpacing the sector average of 15.1%.

EVO’s strategy has prioritised shareholder returns, retaining just 14% of profits for reinvestment over the past three years, with the remainder distributed as dividends. The company’s recent acquisitions, including nine childcare centres in Victoria and Queensland for AU$25.2 million, demonstrate a disciplined expansion approach aimed at strengthening its national footprint.

Although analysts project EVO’s ROE could decline to 7.1% amid broader revenue pressures, the dividend payout ratio is also expected to fall from 86% to 65%, potentially stabilising profit retention and returns.

EVO’s revenue has declined by 17.9% annually since 2019, falling from AU$133 million in 2019 to AU$82 million in 2024. Despite this, its net margin remains relatively strong at 11.1%, reflecting careful cost management.

The early education sector continues to benefit from strong demand, driven by government subsidies and rising workforce participation. EVO’s focus on high-growth markets, particularly in Queensland, positions it well to capitalise on these trends.

Trading at AU$0.74, near the bottom of its 52-week range, EVO appears undervalued relative to its intrinsic GF Value estimate of AU$0.59. With a dividend yield of 9.4%, analysts argue that the stock offers income and long-term growth potential, even as short-term ROE pressures persist.

EVO’s resilience through recent market volatility and track record of converting acquisitions into profit growth further strengthen its appeal for income-focused and growth-oriented investors.

While declining revenue and forecasted ROE dips pose risks, EVO’s earnings momentum, sector tailwinds, and shareholder-friendly policies underpin a bullish outlook.

Analysts recommend EVO as a “Strong Buy” for investors seeking dividends and exposure to Australia’s expanding early education sector.