Schrole Group Ltd - Demonstrating the Benefit of Being Masters of Own Destiny

Equity Bottom-Up

2 Views02 May 2022 08:00

Issuer-paid

SUMMARY

Schrole Group Ltd

Demonstrating the benefit of being masters of own destiny

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 Q1 CY22 cash receipts of $1.05m, up 14.5% on the same quarter in CY21. Significantly, the cash receipts reported for the March 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 product manufacturing and operating costs, excluding employees, declining 67.5% on that reported in the same period a year ago. Employee costs increased 46% year-on-year but were down 6% on Q4 CY21. The company reported a 25% reduction in operating cash outflows in Q1 CY22 compared with that reported in Q1 CY21, the result of increased cash receipts and $0.39m less paid to ISS. We have maintained our forecasts for CY22 and our DCF-derived base case valuation remains unchanged at $0.03/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 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.

Good growth in Q1 cash receipts, up 14.5% quarter-on-quarter

Schrole Group delivered a 14.5% increase in Q1 CY22 cash receipts quarter-on-quarter and a 24.8% reduction in operating cash outflows of $0.47m compared with $0.62m in Q1 CY21, demonstrating the benefit of ending the ISS relationship with product manufacturing costs declining significantly. SCL ended Q1 CY22 with $4.06m in net cash. SCL continued to invest in human capital in the quarter with employee costs of $0.97m, up 46% y-o-y but down 6.2% on Q4 CY21, and in-line with our estimates. The investment in sales staff is driving revenues with a 10% increase in invoiced sales for all Schrole HR products and product take-up. At the end of the March quarter, the company had 542 invoiced customers taking 1.43 products each on average.

Valuation of $52.7m or $0.03/share

We use the DCF methodology to value SCL (WACC 15.0%, terminal growth rate 2.2%) which derives an equity valuation of $0.03/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.

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