Schrole Group Ltd - Interim Result Reflects Improving Gross Profit Margins

Business model

Schrole generates revenues from both transactional services and the sale of subscription licences to its proprietary software modules, which are designed to provide a sophisticated recruitment, onboarding 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.

Training revenues and EBITDA exceeded expectations

Schrole Group reported revenues of $2.47m, down 9% on the pcp with strong growth in training revenues offset by the change in the ISS agreement and the ensuing impact on software revenues. Training revenues increased 55% to $0.91m in the half, and well ahead of our forecast for $0.81m. Training EBITDA grew five-fold to $0.52m and again outperformed our expectations for the half. Offsetting this was a 27% decline in software revenues as SCL changed the way it reported Connect renewals to just its 50% share. Software EBITDA declined 52% to $0.41m largely due to increased staffing as the company took control of 100% of software sales. We anticipate that this increase in head-count will translate into increased sales over the coming 12 months. Corporate costs also increased in the half, resulting in a $1.6m EBITDA loss from corporate, up from the $1.16m loss reported a year ago and higher than our forecast for an EBITDA loss of $1.44m. Overall the EBITDA loss for the half was $0.67m (excluding share-based payments) compared with a loss of $0.21m a year ago and our forecast for a $0.37m loss. Our forecasts have taken into account the first half and have been adjusted accordingly.

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 to an observed group of listed Australian peers. It is at a 20% discount to edtech peers and a 44% discount to HR-tech peers, discounts which we feel are not justified.