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Tribal turns the corner
From out of the night and into the light, education technology supplier Tribal (TRB:AIM) is starting to look like a more promising investment proposition after three years-plus in the relative darkness. It has appointed new management and undergone a complete root and branch investigation of the business.
Slowly but surely the operational performance is changing for the better, and as is so often the case, early investors have been ahead of the curve. Tribal’s share price has jumped 60%-plus to 93p so far in 2017, levels not seen in 18 months or more. Yet there should be plenty more value still on the table if operating margin improvements come through.
Tribal provides student management systems to higher education, further education, schools and training providers in the UK and internationally. This includes campus facilities management software, providing a range of benchmarking tools and relevant data analytics for both students and education institutions.
Additionally, through its Quality Assurance Solutions (QAS) division, Tribal provides inspection services used by Ofsted and government agencies in the US and Middle East, although the Ofsted contract runs out later this year.
When current chief executive Ian Bowles joined Tribal on 1 March 2016 he was faced with a business in chaos, with a balance sheet so stretched by debt it was close to breaching its banking covenants.
Getting fresh funding was paramount and this was achieved through a deeply discounted £21m rights issue on 16 March 2016, and the sale of its non-core Synergy children’s service business to Servelec (SERV) for a similar amount.
Bowles is now able to see a bright future ahead, and business through 2016 bears that out. There was the expected 15% decline in revenue to £90.3m, but a better than originally expected uplift in adjusted operating profit, from £2.5m to £4.7m.
After stabilising the business, strengthening the group’s financial position and driving notable operating efficiencies, Tribal now has a platform on which to develop new technology and drive sustainable growth going forward.
Bowles has high hopes for a 20% operating profit margin by the end of 2018. In 2016 the figure was 5.2%.
It’s worth noting that investment bank Investec, one of the company’s two brokers, is forecasting barely half that operating margin target, at 10.7%, so there’s scope to substantially outperform expectations.
Taking operating margins from 5.2% to 20% in two years may appear overly ambitious but Bowles has discovered plenty of opportunities.
Centralising sales to put a stop to staff sometimes competing with each other for mandates is one obvious example. First class flights to client meetings have also been knocked on the head, while some staff have been let go and several satellite offices closed.
That’s slashed £9m from central costs and more efficiencies are anticipated going forward.
Students more Demanding
Bowles is also tapping into the vast market knowledge of his team, many with years of experience.
He’s also savvy enough to study the most successful software companies in the world and try to emulate what they do.
Most students are now expected to fork out thousands of pounds in tuition fees so it is unsurprising they demand value for money.
Providing the right kind of technology is one way in which universities and colleges are trying to differentiate themselves in the battle to fill places.
Beyond the turnaround phase, good quality software businesses are capable of operating margins in the mid-to-high 20% range, something Bowles accepts.
But let’s not get ahead of ourselves. That presents a different set of challenges for further down the line.
In the meantime, given the strong share price run and where forecasts are currently pitched, the shares no longer look cheap. The price to earnings (PE) multiple stands at 31 for the year to 31 December 2018.
However, that valuation is clearly based on forecasts designed to be beaten. Assuming 15% operating margins, and that all else is relatively equal (tax at 20%, for example), earnings per share of 5p in 2019, instead of the 3.3p factored in by Investec, may not be out of the question, implying a PE of 18.5.
It is perhaps too early to recommend the shares as a firm ‘buy’ but the company is in good hands and there is substantial potential. Investors should watch for progress updates as 2017 could be a big year.