Schrole Group Ltd - Rio Tinto Purchase Order Underpins H1 CY23 Outlook

Business model

Schrole generates revenue 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 purchase order sets up Q1 CY23 growth

Schrole Group has announced that existing customer Rio Tinto (ASX:RIO) has made a purchase order of $300,000 for on-the-job training across Rio facilities in WA in Q1 CY23. Schrole Develop will provide 25 courses for approximately 200 staff across Rio’s WA facilities, which equates to a 27% increase in course delivery compared to the equivalent training provided in the prior corresponding period. The courses will be invoiced in Q1 CY23. We are forecasting $1m in revenue from Schrole’s training division in H1 CY23 so this contract puts the company well on the way to meeting and potentially exceeding our forecasts, which also factor in 15% year-on-year growth. The contract is in addition to work Schrole is currently doing in Guinea on behalf of Rio Tinto, where it has been engaged to assess capabilities and governance of selected universities and vocational education schools in Guinea and provide recommendations to support the training of the proposed workforce for Rio Tinto’s Simandou iron ore project in that country. Schrole has previously worked with Rio Tinto in Mongolia to upskill more than 2,000 vocational teachers to Australian standards. We have made no changes to our forecasts following the announcement but pleased to note that it well underpins our forecasts from training for H1 CY23.

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. Our valuation incorporates our expectation that SCL will move to positive EBITDA in H2 CY23 and that the company generates a 10-year CAGR in revenue of 17.8%.