THE TURNAROUND
Within its core Education markets, Tribal Group (TRB.LON) holds market leading positions in the provision of administration software and related systems and services.
However, in the years preceding 2016, the company followed what we would describe as an ill-disciplined Buy and Build strategy, which led to product overlaps and poor integration together with, in our view, aggressive capitalisation of costs. A new management team was put in place in 2016, and we are now 1 year into a 3 year turnaround plan, with all of the year-1 objectives fully satisfied.
The shares have gained 251% from their Jan-2016 lows, albeit from a distressed starting point. But the interesting thing for investors as of today is the extent of the profit margin upside that is still on the table. We believe the company can improve from 5.2% adjusted operating profit margin in 2016 to approaching 20% by 2020.
ATTRACTIVE MARKET POSITION
The refocussed business enjoys strong positions, with high market shares in relatively stable, low churn customer markets. This creates the foundation for a low beta, high margin, cash generative business. In this report we outline the market positions of the group.
In order to realise the full potential, the company needs to build on its realigned product strategy to realise the full available operating efficiencies and drive profitability higher.
Based on the results already delivered in 2016, we believe there is a credible pathway to substantial earnings growth over the next 4 years, shown in our forecasts below
VALUATION UPSIDE
For a multi-year turnaround situation, we believe the best way to look at valuation is in terms of exit multiples. We use our 2020e forecasts, as this is the first full-year of fully restored profitability in our forecasts. Given the low beta nature of the business, we believe it would be realistic to apply an exit multiple of 12x EV/ Operating Profits.
Based on our 2020e Operating Profit forecast of £18m, and a £20m net cash position at y/e 2020, this would imply a share price of 120p, some 50% gain from the current level.
The charts above shows Tribal Group revenues by geographic market and by customer segment (for SMS products). The company is organised along three operating segments:
STUDENT MANAGEMENT SYSTEMS (68% OF 2016 GROUP REVENUES
The SMS division supplies software systems for educational institutions, spanning enrolment, assessments, exams, through to graduation. The business derives revenues from licence fees (18% of 2016 revenues), project implementation (20%), maintenance services (53%), and other services (9%).
A key plank in the turnaround of Tribal Group (TRB.LON) has been the developing of a common platform to eliminate duplication of effort and then to deliver bespoke solutions to customers using a modular approach. New capabilities will be delivered to customers under this approach during 2017.
I-GRADUATE (9% OF 2016 GROUP REVENUES)
The i-graduate business provides surveys, analytics, and related services to allow institutions to measure and enhance the quality of education and student experience that they provide. This is potential growth area as more colleges and universities continue to adopt a commercial approach to attracting students.
QUALITY ASSURANCE SOLUTIONS (23% OF 2016 GROUP REVENUES)
The i-graduate business provides surveys, analytics, and related services to allow institutions to measure and enhance the quality of education and student experience that they provide. This is potential growth area as more colleges and universities continue to adopt a commercial approach to attracting students.
OVERALL – A POSITION OF MARKET LEADERSHIP
The following chart shows that, putting the pieces together, the group has very strong market positions in its main customer segments. We believe that the group’s strong market presence is a major asset in the journey to improved profitability.