Schrole Group Ltd: Putting Smarts into Education HR

Equity Bottom-Up

942 Views05 Oct 2021 08:00

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SUMMARY

Schrole Group Ltd

Putting smarts into education HR

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. Connect has grown from an initial six international school clients when the business was founded in 2013 by the company’s Managing Director Robert Graham (who has an 11% stake in SCL shares) to more than 385 at June 30. Schrole Group has an established market presence and strong reputation in the global market for recruitment in the highly skilled international school segment. We believe the business is at a major earnings inflection point following the recent launch of Connect 3.0 which incorporates an upgraded and expanded suite of capability, as well as a number of new bolt-on product modules, including Schrole Events 1.0, which in combination are expected to significantly expand the revenue opportunity per customer. With normalisation of global travel in 2022 likely to further support the international school sector, and capable and aligned management driving the business we see a significant opportunity to grow earnings and market share. Our base case DCF valuation of $0.035/share (15.0% WACC, 2.2% terminal growth rate), predicated on compound sales growth of 19.1% over the next five years.

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.

Achieving Scale and Profitability = Leverage
After building the business up to >$6m in sales and close to A$5m (US$3.3m) in annualised recurring revenue (ARR), the company is approaching an initial milestone of scale where small emerging technology companies typically attract the attention of a broader audience (~$5m ARR). We see potential for the company to drive scale towards a point of near-term profitability with the benefit of the expanding product suite, the termination of the ISS relationship, and additional sales capability added in FY21.

Valuation of $49.7m 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. At the current share price, Schrole Group is trading at a significant discount to two groups of observed SaaS peers.

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