Schrole Group Ltd - Investing for Growth

Equity Bottom-Up

1.1k Views07 Mar 2022 08:00

Issuer-paid

SUMMARY

Schrole Group Ltd

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 delivered a 40.3% improvement in CY21 gross profit to $4.7m, which translated into a gross profit margin of 89%. The gross profit margin was ahead of our forecast for 82% and reflects the benefit of the wind-down of the revenue-sharing agreement with International School Services. From January 1, the shared invoicing with ISS ceased on all renewal customers, allowing Schole to retain 100% of all renewing customers. Underlying EBITDA improved to a loss of $0.6m, a 25.8% reduction on FY20, while the underlying NPAT loss was $1.0m, a 47.7% improvement on FY20, although below our forecast for a net loss of $0.5m. Schrole Group invested additional resources in people and sales and marketing in CY2021 in anticipation of the end of the ISS agreement and in advance of the February 2022 launch of Schrole Engage 1.0 and its strategy to expand its presence in Europe and North America. We have adjusted our CY2022 and CY2023 cost base to reflect further human capital and marketing investment. We have also rolled our model for the new financial year and this has resulted in our DCF-derived base-case valuation increasing to $0.031/share (previously $0.03/share).

Business model

Schrole generates revenue 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. The company has progressively added to its product suite over the past 12 months with the launch of Schrole Connect 3.0 and Schrole Events 1.0 during CY2021, and the launch of Schrole Engage 1.0 in February 2022. All Schrole HR modules are now in market, expanding up-sell and cross-sell opportunities.

Strong growth in gross profit margin, now at 93%

Schrole Group delivered a 51.2% increase in gross profit margin to 89% in CY2021, driven by the wind-down of the ISS agreement which ceases from 1 July 2022. The GP margin was ahead of our forecast for 82%. Sales revenues for the year were $5.26m, down 7% on the pcp due to software revenues (down 15%) being impacted by the amended ISS agreement, offset somewhat by a 31% improvement in training revenues, continuing a post-pandemic recovery. SCL invested in its sales team in CY2021 as it rolled out the remaining modules of the Schrole HR suite, lifting employment costs 27% year-on-year. Schrole’s investment in sales and marketing increased 267% to $0.22m and IT expenses rose 28% to $0.43m as the company readied the business to go it alone. We have captured additional sales and marketing and employee costs in our forward estimates and anticipate that this will translate into increased revenues in CY2022 and CY2023.

Valuation of $53.5m or $0.031/share (previously $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 $0.031/share (previously $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.

Get started on the Smartkarma Research Network with a complimentary Preview Pass to: