Schrole Group Ltd: Strong End to CY21, Momentum Building for CY22

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1.2k Views01 Feb 2022 08:00

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SUMMARY

Schrole Group Ltd

Strong end to CY21, momentum building for CY22

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 Q4 CY21 cash receipts of $1.7m, up 44% on the September quarter and 5.1% ahead of the same quarter in CY20. Significantly, the cash receipts reported for the December 2021 quarter only include 50% of the cash receipts from customer renewals (as opposed to 100% in 2020) due to the wind-down of the International Schools Services (ISS) partnership agreement. Cash costs demonstrated the benefit of the wind-down of the ISS arrangement, with product manufacturing and operating costs, excluding employees, more than halving on that reported in the same period a year ago. The company reported positive operating cashflow of $0.276m for Q4 CY21, its best cash profit since Q3 CY19, signalling the company’s recovery from the impact of COVID and the wind-down of the ISS relationship. From January 1, the shared invoicing with ISS ceased on all renewal customers, allowing Schole to retain 100% of all renewing customers. We have maintained our forecasts for CY21 ahead of the company reporting its full-year results later this month and our DCF-derived base case valuation remains unchanged at $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 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.

Strong growth in Q4 cash receipts, up 44% quarter-on-quarter
Schrole Group delivered a 44% increase in Q4 CY21 cash receipts quarter-on-quarter and positive operating cashflow of $0.276m, its first positive operating cashflow in CY21 and best result since Q3 CY19. The result demonstrates the benefit of ending the ISS relationship with product manufacturing and operating costs declining significantly. SCL invested in its sales team in the quarter with employee costs of $1.03m, up 77% y-o-y and 17% q-o-q, although below our estimates, and this drove sales with customer numbers for Schrole Connect increasing 4% to 451 in the December quarter, new sales generated in Europe and the Americas and 51 schools secured to beta-test Schrole Engage ahead of its Q1 CY22 release.

Valuation of $52.0m 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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