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Strong Revenue Trajectory Ahead for Schrole

Small Caps | Sep 18 2018

This story features SCHROLE GROUP LIMITED. For more info SHARE ANALYSIS: SCL

Schrole Group offers international schools a number of candidate management solutions, along with training services in Western Australia. TMT Analytics takes up analysis of the stock.

-Assists the hiring process for both recruiters and candidates
-Education sector ripe for digital disruption
-Positive on net cash flow in FY19, operating leverage to gradually increase


By Eva Brocklehurst

International education is an attractive and growing market and Schrole Group ((SCL)) has a suite of digital platforms to cater for specific teacher requirements. The subscription-based model provides teachers with an option to apply for the best-fit job opportunities.

Technology is assisting the education sector to provide more efficient and accessible delivery of school programs as well as better recruitment and background verification, and the company's Advantage platform is a cloud-based offering that eases the hiring process for both recruiters and candidates.

Advantage provides channels for recruiters to interact with candidate teachers including online portals, fairs, apps and virtual events. The database is highly secure with sophisticated encryption of details on a separate authentication server.

The Connect platform is an online recruitment management tool that filters the teacher database according to the specific requirements of certain schools. The Cover platform enable schools to search and recruit temporary replacement teachers and a casual workforce. The latest tool, Verify, is customised for background verification of teachers. This provides international schools with the option of background screening done on the company's platform.

The company has two vertical operations, recruitment software and vocational training. ETAS is the accredited vocational training institute which offers courses to corporate and individuals and accounts for around 29% of revenues in 2017.

The company started in 1994 as a vocational training organisation with ETAS, largely catering to the Australian mining sector. The business growth was gradual, albeit severely affected in 2015/16 because of a downturn in the mining sector and tightening of regulations for vocational training across the country. Schrole Group was established in November 2015 through the consolidation of ETAS and Schrole.

Strategic Alliances

TMT Analytics suggests two strategic alliances have provided substantial outreach to international schools for the company. The first is the joint venture with International School Services, a non-profit global provider of support services to international schools. Schrole Group gains access to the network of over 250 schools and thousands of teachers through this JV.

Secondly, the company has formed an exclusive alliance with First Advantage to be a sales agent for international schools across Asia-Pacific. As candidate screening is paramount for all international schools, this partnership provides a new revenue stream that can be scaled globally. The analysts suggest the attractive nature of the market is illustrated by the fast growth across the region, as emerging middle classes want better education for their children.

TMT Analytics cites the example of Cognita, which was acquired by private equity firm Jacobs for GBP2bn or 26x operating earnings (EBITDA). Cognita started in 2004 and already runs 70 schools in eight countries, educating 40,000 students. The analysts believes the education sector is ripe for digital disruption and, as the proportion of digitally-empowered populations increase, the upgrade of teacher recruitment channels is considered inevitable.

The need for a casual workforce automation platform in the Australian service sector is also considered significant, as the country has the third highest proportion of casual workers in the workforce among advanced nations.

Financial Outlook

Management is focused on the high-growth software segment to compensate for a structural decline in its training segment. Revenue from the training segment was down -85% in 2017 versus 2015 while software grew to $970,000 in 2017.

TMT Analytics incorporates anticipated revenue synergies and cross-selling opportunities into its financial model from the strategic partnerships and believes there are likely to be further opportunities for the company going forward. The analysts expect a recovery in ETAS revenues going forward because of improvements in training and diversification of on-the-job-training, but the main growth driver is expected to be the software segment.

The 2019 northern hemisphere academic year has just started and is the first in which the company will leverage its new partnerships. Revenue recognition rules require the company to defer around 50% of its annual revenue into the next financial year.

Consequently, the analysts point out, the strong revenue trajectory in the next five years means top-line income is understated and will result in a few more years of losses until FY21. In that year, Schrole Group is expected to turn profitable. As a result, TMT Analytics prefers to look at net cash flow and on these terms the company will be positive in FY19.

The analysts also expect operating leverage to gradually increase, with employee expenses falling to 21% of revenues in 2020 from 43% of revenues in 2018. Capacity expansion is required in the training sector but head count is not expected to increase in the software segment.

TMT Analytics initiates coverage with a Buy rating and 3.7c target, on a blend of discounted cash flow and relative valuation methods. The company has paid for the TMT Analytics research.

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