Schrole Group Ltd - Best Ever June Operating Cashflow
Schrole Group Ltd
Best ever June operating cashflow
Schrole Group Limited (ASX:SCL) is an Australian software company focused on providing technology solutions to the international education and training sector. Schrole HR has a suite of five established and emerging human resources Software-as-a-Service (SaaS) offerings including its core product, Schrole Connect, a SaaS-based staff recruitment platform. Schrole Group has reported a 53% improvement in June quarter CY2022 net operating cashflow compared with Q2 CY2021, the company’s best ever June quarter result since listing in 2017. The operating cash loss for the quarter was $0.332m compared with an operating cash loss of $0.71m in the same quarter one year ago. Cash receipts for the quarter were $1.06m, up from $0.92m in June 2021 and slightly ahead of Q1 CY22 cash receipts of $1.05m, although below our forecasts for $2.4m for the quarter. Significantly, the cash receipts reported for the June 2022 quarter only include 50% of the cash receipts from customer renewals (as opposed to 100% in 2021) due to the wind-down of the International Schools Services (ISS) partnership agreement. Cash costs continued to demonstrate the benefit of exiting the ISS agreement, with operating costs declining 13% year-on-year despite an increased investment in human capital. The company ended the quarter with $3.27m in net cash. We have adjusted our forecasts to bring cashflows back in line with the growth rate experienced by the company in H1 CY2. Our valuation has also incorporated a higher risk-free-rate (3.5% versus 2.0%) to reflect the increase in the 10-year Treasury rate and this has resulted in a reset of our DCF- derived valuation to $40m or $1.15/share.
Business model
Schrole generates revenues from the sale of subscription licences to its proprietary software modules, which are designed to provide a sophisticated recruitment and training platform for highly skilled staff within the international schools segment. SCL develops its software in- house, which enables more efficient development of the platform and new features while allowing for third-party integrations. In combination with SCL’s strategy of active client engagement, and the conservative nature of decision-making processes inherent within the international schools segment (SCL’s core customer base), the business has a clear competitive edge and highly defensible market position. We believe SCL has a considerable revenue growth opportunity within and across existing clients, driven by management’s targeted expansion in contract value per customer from ~$10kpa at present to ~$30kpa as schools take up more Schrole modules.
Good growth in Q2 cash receipts, up 14.9% quarter-on-quarter
Schrole Group delivered a 14.9% increase in Q2 CY22 cash receipts quarter-on-quarter and a 55% reduction in operating cash outflows of $0.33m compared with $0.73m in Q2 CY21, demonstrating the benefit of ending the ISS relationship with product manufacturing costs declining significantly. Q2 is traditionally SCL’s quietest quarter. The company ended Q2 CY22 with $3.27m in net cash. At the end of the June quarter, the company had 528 customers taking 1.37 products each on average and an average contract value of more than $10,000 a year.
Valuation of $40m or $1.15/share
We use the DCF methodology to value SCL (WACC 15.1%, terminal growth rate 2.2%) which derives an equity valuation of $1.15/share. SCL continues to trade at a significant discount (37%) to its edtech and HR listed Australian peers, despite recent share price falls across both peer groups.
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- Schrole Group Ltd - Best Ever June Operating Cashflow29 Jul 2022