TRIBAL GROUP PLC - AN EXAMPLE OF OUR ANALYSIS
Please note this material is intended as an illustration only and should not be considered advice. You should make your own investment decisions.
Here are two articles we wrote about Tribal in the March 2018 and April 2018 newsletters to introduce the company to subscribers. For our most recent comments and advice on the company, please subscribe to the newsletter.
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From Techinvest March 2018
Education software and services provider Tribal Group (80.3p) has agreed to a collaboration with US software giant Microsoft Corp to expand the number of educational institutions that can access Tribal’s Student Information Systems. Under the collaboration, Microsoft’s Azure development team will work with Tribal on the creation of the latter’s new cloud-based platform Tribal Edge, and convert the current applications of SITS:Vision and ebs to a cloud environment. Also, Tribal will offer both applications in the Azure marketplace as cloud ready solutions, and Microsoft will promote the company’s portfolio in new geographical markets. Tribal said that it believes that the collaboration with Microsoft will quickly reap significant benefits for existing and prospective customers of both companies.
Tribal has been making good progress recently following the introduction of a new operating model and organisational structure in 2016. In a trading update for the year ended 31 December 2017 the company reported that it expects that the financial performance will be materially ahead of the prior year. Tribal said that the outperformance has been driven by effective cost control and a balanced improvement across all lines of business. The company has a strong balance sheet, with no long-term debt, and the year-end cash balance is expected to show an increase over the position in 2016. Consensus broker forecast for 2017 is adjusted pre-tax profit of £7.94m and earnings per share of 2.85p. These figures rise to £9.89m and 3.69p respectively for the current year. While a prospective P/E for 2019 of 21.8 is not cheap, neither is it off-putting given the strong rate of growth that is emerging from the business. N+1 Singer argues convincingly that the upside potential for Tribal lies in its operating margin. Given the mix of technology and services in the business, the broker believes that the company should be capable of generating 15-20% margin. This is quite some way ahead of current consensus forecast margin for the period 2017 to 2019 which is in the range 8.7%-12.2%. The broker notes that Tribal’s management team seem confident about being able to extract further efficiencies while continuing to execute on the company’s growth strategy. The recent collaboration deal with Microsoft adds to the potential in the business and helps to illustrate the scale of the opportunity Tribal is targeting in the education sector.
Tribal’s business ran into difficulties in 2014 and 2015, but indicators are that the company is now back on track and making good progress with its new strategy and operating model. Back in 2013 Tribal generated pre-tax profit of £13.5m and earnings per share of 8.95p. A return to that level of performance is at least a couple of years off, but it helps to illustrate the considerable potential for recovery in the business. We feel that the shares are worth tucking away at this level in anticipation of a growth spurt in the business over the next few years. Buy, and we will write more about Tribal next month.
From Techinvest April 2018
TRIBAL GROUP FACT FILE
Telephone: 0117 311 5293
FTSE Class: AIM
EPIC Symbol: TRB
Shares in Issue: 196.05m
Market Capitalisation: £155.27m
Year-end: December 31
Adjusted earnings per share:
2018 3.64p (consensus broker forecast)
2019 4.17p (consensus broker forecast)
Price Earnings Ratio:
Last month we made educational software and services provider Tribal Group a New Buy at 80.3p. The company has been making good progress since the introduction of a new operating model and organisational structure in 2016, and we were impressed by the recent announcement of a collaboration with Microsoft to expand access to Tribal’s Student Information Systems (SIS). Tribal has a portfolio of student management systems, allowing it to offer best of breed functionality to meet the needs of its customers across the whole range of the education market – from schools to higher education – and across geographies. Recent acquisitions also gave the group a strong offering in cloud-based solutions, opening up large sections of the addressable market, given the flexibility a SaaS delivery model provides. On top of this, Tribal has a range of performance improvement tools that are increasingly being embedded in its systems, enabling more effective distribution and cross selling of the tools across the company’s wide installed base. Over the last three years, Tribal has broadened its portfolio, internationalised its customer base, won and delivered landmark contracts, and significantly strengthened its balance sheet. Significant investment in R&D has also led to the launch of several innovative products that enhance and extend the range of solutions available to the customer base. This all leaves the company in a strong position to exploit what is a global market opportunity in education services worth at least £1.4bn per annum.
Organisationally, the company is divided into three divisions. Student Management Systems (SMS) includes an SIS toolkit that enables colleges to manage the complete student lifecycle from attracting applicants, on-boarding new recruits, day-to-day support, exams and assessments, to graduation and alumni communities. The customer base for the toolkit includes over half of the universities in the UK, with a strong representation also in Australia, New Zealand, Canada and South Africa. Another part of the business provides management systems for circa 3,500 schools in Australia. Alongside SMS there is a Quality Assurance Solutions (QAS) division that provides review and evaluation services to help improve the quality of education in schools and colleges globally. Around 15000 inspections are carried out by the company around the world each year. There is a third division, i-graduate, which provides a range of services for managers of universities, colleges and schools, so they are able to assess and enhance the quality of the education they provide and improve their operational performance. Also included in this line of business are non-core services, not forming part of SMS or QAS. These include K2 Asset Management, Software Solutions and Information Matters.
Latest results are for the twelve months to December 31. Revenue of £84.9m was down from £90.3m in the prior year, reflecting a combination of the expiry of an Ofsted Early Years contract and the disposal of a peripheral business. Annual recurring revenue increased by 5% to £37.5m and adjusted operating profit climbed 82% to £8.5m. Strong operational cash inflow of £11.1m was achieved during the year (2016: £8.3m), with operating cash conversion of 130%. Year-end net cash increased by £5.3m to £14.1m (7.2p per share). During the year, the company secured significant new contract wins in the Higher Education sector, including Sheffield University, Glasgow Caledonian University, and the University of Malaya. Tribal also finalised a four-year extension to a contract worth approximately £16.8m, involving the provision of student information systems to eleven Australian universities and migration into the company’s new cloud-ready platform, Tribal Edge. The QAS business performed well and secured significant contract wins with the Ministry of Education of Dubai & Northern Emirates. QAS has broadened its offerings beyond School Inspections to include Performance Benchmarking and Professional Development & Training, where there are significant opportunities both in the UK and worldwide. There was also a strong performance from Further Education and Work-based Learning, particularly in the UK where the growth is being driven by significantly improved software sales to new business customers, and internationally where a Campus solution at the British Council has been successfully rolled out to 34 APAC countries.
Next generation, cloud-based platform Tribal Edge provides an opportunity to widen the range of SIS services offered and to win new customers across a wider range of education providers and territories. Launched in July, the company reports that the new platform has already drawn high interest and secured commitments for beta sites and early adopters for the first modules. Progress has been further enhanced with a strategic partnership with Microsoft. Microsoft’s Azure application development team will work with Tribal to accelerate the creation of new functionality, enabling the rapid development of an enhanced cloud-based platform and the conversion of the current service offerings to the Tribal Edge framework. Outside of Higher and Further Education, Tribal has continued the successful development of SchoolEdge, a new, web-based product for schools. Customers in Australia have adopted many of the new modules available and the development continues to offer a completely refreshed student information system for schools. Another product with a promising future is Maytas, a management solution for employers and training providers. Demand for the product has been particularly high in the UK where the Government’s introduction of the Apprenticeship Levy has encouraged companies to launch apprenticeship schemes. Maytas fully supports the management of apprenticeship programmes, including the critical area of funding.
For the current year, consensus broker forecast is for adjusted pre-tax profit of £9.89m and earnings per share of 3.64p. These figures rise to £10.5m and 4.17p respectively for 2019. While the shares are not especially cheap on a prospective P/E of 18.99 for next year, this looks more than justified given the strong growth emerging from the business and the excellent prospects for adoption of the new cloud-based Tribal Edge product suite. Continue to buy.
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