Schrole Group Ltd: Building Core Profitability While Investing for Growth

Equity Bottom-Up

284 Views29 Oct 2021 08:00

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SUMMARY

Schrole Group Ltd

Building core profitability while investing for growth

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 Q3 cash receipts of $1.18m, up 28% on the June quarter and down 19.4% on the same quarter in CY20. Cash costs demonstrated the benefit of the wind-down of the International School Services (ISS) partnership, with product manufacturing and operating costs almost halving on the same period a year ago and declining 38% on the June quarter. Schrole Group noted that encouraging October sales had established a positive base for the December quarter with a significant sales pipeline and upside from global COVID-19 recovery to come. This accords with our forecasts for the seasonally strongest quarter for Schrole. With the recent launch of Schrole Connect 3.0 and Schrole Events 1.0, we anticipate that the company will both gain new customers and upsell to its existing clients. This was demonstrated in Q3 with the company ending the quarter with 419 clients, up from 386 at the end of Q2. We have maintained our forecasts for Q4 and CY22 and our DCF-derived base case valuation remains unchanged at $0.035/share.

Business model
Schrole generates revenue from the sale of subscription licenses to its proprietary software modules, which are designed to provide a sophisticated recruitment and training platform for highly skilled staff within the international school 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 more modules are added over the next two years. At the same time, earnings quality is expected to improve as the termination of the ISS relationship results in expanded operating margins and recurring SaaS licence revenues with its share of total revenues trending higher.

Strong runway to the end of the year
Schrole Group has noted that a strong October performance augurs well for the December quarter and full-year result. Historically, Schrole’s fourth quarter generates between ~30- 50% of the total cash receipts for the year. We are forecasting $1.97m for Q4 cash receipts which equates to 39% of the total year’s receipts. Schrole, which ended Q3 with 419 international school customers, noted that the sales pipeline was growing with several schools and school groups, not previously customers, undergoing free trials or were in contract negotiations.

Valuation of $49.3m or $0.035/share
We use the DCF methodology to value SCL (WACC 15.0%, terminal growth rate 2.2%) which derives an equity valuation of $0.035/share. We believe the growth strategy in place is sensible and deliverable, and the business has a clear runway to optimise and stabilise key sales and earnings drivers over the next 12-24 months. As we highlighted in our 5th October initiation report Putting smarts into Education HR, at its current share price, Schrole Group is trading at a significant discount to two groups of observed SaaS peers.

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