Small Caps | Feb 19 2018
3P Learning surpassed expectations in the first half, amid revenue growth from all operating regions, and brokers suggest the stock is ripe for a re-rating.
-Material improvement in ARPU in the Americas and EMEA
-Latent value in the stock amid options for rolling out new products
-Divestment of Learnosity could be a catalyst
By Eva Brocklehurst
3P Learning ((3PL)) made strong progress in the first half and now has an optimised sales force as well as improved products. New product releases are on track for the rest of the year.
The company surpassed market expectations with underlying operating earnings (EBITDA) up 21%. Revenue growth came from all regions, supported by material improvements in average revenue per unit (ARPU) in both the Americas and Europe/Middle East/Africa (EMEA). This follows the unbundling of low value licences in the Middle East and the Americas.
The company achieved 19% revenue growth in US dollar terms in the first half, following its 31% growth in the prior corresponding half. Active users were around 52% higher. These are considered by brokers to be strong signs of product validation and momentum.
Guidance for FY18 margins have been reaffirmed. Deutsche Bank forecasts 50 basis points of margin expansion in FY18, to 30%.
The company has reiterated a focus on its Australasian market share and the expansion of revenue per customer through growing product lines. In EMEA, new re-sellers have been appointed and more partnerships in Africa are being targeted.
Meanwhile, increased competition has thrown up challenging conditions in the Middle East and UK. Head count was reduced in the Americas and this helped contain costs. Partners have also been appointed in Latin America to penetrate new geographies and Spanish Mathletics is to be launched in FY19.
Morgan Stanley likes the stronger growth trajectory and suggests, if the company can deliver an acceleration in subscribers it will re-rate. Double-digit sales growth would inspire confidence that the the company can return to a strong sales profile.
The broker lifts forecast for earnings per share by 10-13% for FY18-20. While forecasting subscriber growth in Asia-Pacific and the Americas, declines over the past year mean the broker's averages calculation does not climb materially in the second half.
ARPU, on the other hand, has accelerated materially in EMEA and the Americas and this underpins upgrades to Morgan Stanley's forecasts. The company has reiterated the target for a net cash position by the end of the second half.
EMEA is clearly the softest area for the business, the broker points out, because of budgetary pressures in the UK, as well as competition.
Macquarie observes, following the recent share price rise, the valuation gap has narrowed. Still, latent value resides in the stock, in the broker's view, amid options from the rolling out of products such as ReadWriter and Spanish Mathletics. Investor intention is expected to increasingly shift to the delivery of licence and product growth in FY19.
Management has indicated that its 40% stake in Learnosity is up for sale, given a re-directing of its strategic priorities. Learnosity is an integral part of the company's product range and has long-term contracts but the company does not consider itself a natural owner. Value is $46.3m, largely in line with Macquarie's sum-of-parts valuation.
Deutsche Bank suggests a divestment of the Learnosity stake would be a key catalyst, given the limited value currently ascribed by the market. At $46m, the valuation appears light in the broker's calculations, relative to current software-as-a-service market pricing.
Morgan Stanley also believes Learnosity is underappreciated. This is a fast-growing business that is acquiring customers, up selling and generating free cash flow.
The broker suggests such a scenario justifies a valuation of over $80m for the company's stake. Management has signalled its stake is sub-optimal and the company is not a buyer of the asset, which implies a plan to divest and realise value.
Risks include potentially losing the Reading Eggs distribution rights, which would present downside to earnings, Deutsche Bank asserts, given the re-seller agreement contributes over 10% of revenue.
Other risks include currency, as the company derives more than 20% of its earnings offshore and these earnings are unhedged. Competitive tensions are also expected to increase.
FNArena's database shows three Buy ratings for 3P Learning. The consensus target is $1.96, signalling 20.4% upside to the last share price. This compares with $1.78 ahead of the results.
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