Tribal Group – pay attention at the back there

Tribal Group is another company with significant annual recurring revenues that has caught the eye of Mark Watson-Mitchell.

This profile is yet another in my series of covering companies that have increasing annual recurring revenues (ARR). 

Annual recurring revenue is a simple and beautiful metric because it is easy to understand and provides a clear sense of scale and stability.

It refers to the monetary value of a subscription-based company’s subscriber base or yearly value of a single subscription. ARR is the metric most often used to measure yearly revenue for subscription services, such as software services.

In my view, ARR is a highly desirable quality. It makes a company more stable and predictable, both operationally and financially, while lowering the risks that a business will take from one month to the next. 

Today’s company, the Tribal Group (LON:TRB), less than a fortnight ago announced its trading update for the year to end-December, in which it declared that its ARR increased to £44.5m – which is a run-rate of some 61% of this year’s estimated turnover.

Tribal Group’s mission is to empower the world of education with expertise, software products and services needed by education and business organisations worldwide that underpin student success.

It classes itself as a pioneering world-leader of education software and services. In providing these services it works with higher education, further and tertiary education, schools, government and state bodies, training providers and employers.

Its Student Information Systems provides a broad range of education services covering quality assurance, peer review, benchmarking and improvement; and student surveys that provide the leading global benchmarks for student experience.

The group serves over a thousand higher education, further education and vocational institutions; several thousand schools; and many government and state bodies, training providers and employers.

It operates internationally in more than 55 countries, supported by a development centre in Manila, Philippines. 

It boasts of having over 850 professionals with deep educational domain expertise operating across its offices in the UK, Australia, New Zealand, Canada, US, Middle East, Philippines and Malaysia.

Mark Pickett, CEO of the Bristol-based Tribal Group, commented in the trading update that, “Never has the need for cloud-based solutions for the Education market been more pressing. The investments we have made position us at the forefront of this evolution in our industry, providing for an exciting future for Tribal.” 

Earlier in the year it made some very necessary cost savings, and continued to make inroads on its sales strategy, having recently announced two good contract wins. In Q3 conditions certainly seemed to be improving for the group, as it made some very positive progress. 

In fact, the company upped the previous guidance on revenues and profits for the year, with its brokers Investec Bank now showing a forecast of £72.5m (£78.2m) revenues and £11.2m (£11.3m) pre-tax profits, worth 4.4p (4.4p) in earnings per share, and more than double covering a 2p (nil) dividend.

Going ahead into 2021 and 2022 respectively, Investec estimates £73.5m of sales rising to £75.1m, generating pre-tax profits of £11.5m then £11.7m, worth 4.5p then 4.6p per share in earnings.

This cash positive group (£11.2m net as at 23 October) is not setting the world alight on those estimates; however, I do like the steady progress that is now being shown.

This cash positive group (£11.2m net as at 23 October) is not setting the world alight on those estimates; however, I do like the steady progress that is now being shown.

There are 205.7m shares in issue, the larger shareholders include RWC Focus Asset Management (21.5%), Harwood Capital (9.85%), GVQ Investment Management (8.79%), Schroder Investment Management (8.68%), Henderson Global Investors (5.92%), Legal & General Investment Management (4.99%), Herald Investment Management (2.33%), and Coltrane Asset Management (2.04%).

With its shares currently trading at 65p that values the group at £133.7m, which is a mere three times recurring revenues. Considering that global takeover activity in this sector ranges from at least five to seven times ARR, that shows that Tribal’s shares are cheap.

On the back of the recent trading update Investec bank has upped its price objective to 85p, which seems an easy aim.

However, I now fix my target price for Tribal Group at 80p, which gives a 23% upside.