Tribal Group: (TRB.L, FTSE Small Cap Index, Mkt. Capitalisation £147m, 155p and 2.5% of the JIC Portfolio)
During the last month I have introduced a new stock to my portfolio, Tribal, the educational software business. I have held this stock in the past, between 25th January and 14th August 2012 before selling too early but nevertheless booking a 27% return.
The following summary of its activities comes from its website:
“Tribal is a global provider of products and services to the international education, training and learning markets. Working as one, we focus on helping our customers to deliver excellence. Our extensive expertise and collaborative style have made us a trusted partner to our customers. We have 1,300 staff and our work spans five continents.”
There is a fuller description of the services it offers on its website: www.tribalgroup.com
From its beginnings as a UK company it has in recent years expanded overseas and now has regional offices in Australia, New Zealand and the United States; in 2014 30% of revenue was generated overseas. Last year it entered the university market in southern Africa, complementing its leading position in the UK and Australia. It also continued to develop its presence on North America and the Middle East and made a number of bolt-on acquisitions so that it can deliver additional capabilities in the Asia Pacific region.
It had grown profits consistently between 2009 and 2013 before a hiccup in 2014 which caused the share price to drop, which I think has provided a good opportunity for me to gain exposure to a company with good growth prospects and, due to its business model, one that should generate plenty of excess cash. Many of its contracts are multiyear and there is a significant and growing “software” component which delivers higher margins and strong cash flow.
So what went wrong in 2014? The first signs of potential trouble came in a trading statement last May when it said “As a result of anticipated timing of some important contract closures and software installations, our profits in 2014 will show a greater weighting towards the second half of the year than in 2013. We remain confident of the outturn for the full year.” In November it made a further announcement in which it expressed confidence in the full year but it was still clearly dependent on the timing of some new contracts. However, just before Christmas it issued the following: “Given the timing of a number of contracts, including those announced today, we now believe it unlikely that certain key milestones and completions will be achieved before our year end. As a result, we anticipate that our profits for 2014 will be below the Board’s previous expectations. The Board expects the benefit of these deferred contract milestones and completions will be recognised early next year, which will underpin our expectations for 2015.” This caused a drop in the share price to around the current levels before it staged a recovery up until the 2014 results, which were published in March.
Those results showed a 2% drop in revenue to £123.7m, an 8% fall in adjusted operating profits to £14.5m and adjusted earnings per share 10% lower at 11.3p. The good news – and what attracts to me this stock – was the strong cash generation, with cash conversion of 109% (cash conversion is calculated as operating cash flow from underlying operations before other cash flows and after capital expenditure, divided by adjusted operating profit.) The dividend was increased 13% to 1.8p per share. Net debt at 31st December was £11.7m compared to £14.5m at 30th June.
Why I have bought now
My argument for why it is a “buy” now is predicated on cheap valuation and the assumption that after a year of “delayed contracts” the company will return to growth in the current year. First on valuation, consensus forecasts value the shares at just 10.1x December 2015 earnings for 49.7% growth with a prospective dividend yield of 1.4% after a further 11% growth in the dividend. More importantly the shares are valued at just 10.5x free cash flow. (In 2014, despite at the earnings drop it generated operating cash flow per share of 21p, expensed 6.9p per share on capital expenditure, leaving free cash flow per share of 14.1p.)
It is tempting to take the CEO’s outlook statement with a pinch of salt but I think the reasons for the slight shortfall in 2014 were genuine and that 2015 should show an improvement. “Our expectations for 2015 are unchanged. Whilst customer procurement timelines have extended, our pipeline of new customer contracts is good, including a number of expected contracts where we are preferred supplier. We also remain alert for opportunities to accelerate our progress. As a result, Tribal has good potential to make further progress this year and over the medium term.”
In his statement the CEO also set out clearly its strategy objectives and performance measures:
“As our strategy evolves, it is appropriate that we also evolve our targets and performance measures to ensure they align with our ambitions. Going forward, alongside our existing financial measures which focus on profit margins, earnings per share growth and cash generation, our key performance indicators will include measures of the extent to which:
- Software and analytics-related revenues have become increasingly pervasive in our business (we are targeting at least 80% by 2017);
- We have a substantial and growing recurring software revenue base (we are targeting at least 30% of revenues to be recurring software revenues in nature by 2017);
- Performance improvement tools have penetrated our software customer base (we are targeting at least 20% by 2017); and
- We have a portfolio of international operations (we are targeting international revenues to be at least 50% of total revenues by 2017).
Earnings per share (EPS) will remain a core measure of our success in creating shareholder value. Whilst we fell short of our aspiration to double EPS over the three year period to 31 December 2014, we have grown EPS by over 200% since 2010. Our aspiration is to grow EPS by a further 50% over the next three years.”
I am encouraged that over recent months some investors, who in my opinion are sensible, have bought shares in Tribal; during March Henderson Global Investors and Majedie moved above 5% and Strategic Equity Capital above 3.0%. Strategic Equity Capital has an interesting approach whereby it applyies private equity investment techniques to public markets. They like to “buy good companies and sell when excellent” and look for an element of change in a business over a five year time horizon. I think I have spotted what has attracted them to this: strong cash flow, a growing software component and higher recurring revenues in what should be a long term growth market and, due to last year’s hiccups, an opportunity to get in at a good valuation. (Is this the EMIS of the education sector?)
Conclusion: I think it is a good time to buy with the share price bouncing off 2 year lows and on an attractive valuation. I do not believe there is anything sinister about the CEO, Keith Evans’ recent decision to step down at the end of June and retire from the company at the end of the year, having assisted with a “smooth management transition”. My litmus test of whether a 30% return is possible over the next year points to a target price of 200p; if it got to that price by next June, according to consensus forecasts, the shares would be valued at 14.2x December 2016 earnings and a prospective dividend yield of 0.8%. That looks a realistic target to me, especially if before then we start to see upgrades to earnings as it nails down some of these potential contracts. On that note it kicked off June with the announcement that it had signed a contract to provide its SITS student management system to Massey University in New Zealand with the initial contract anticipated to have a value of at least NZD 6m.
(I bought just a 2.5% holding initially for the JIC Portfolio.)
I manage my website, www.JohnsInvestmentChronicle.com in which I show my portfolio and all transactions. I blog within an hour of trading, with an explanation, and send an alert email to my subscribers. I do not pretend to have all the answers but I hope my portfolio, and the trades, provides food for thought both for experienced investors and those who are new to managing their own portfolios.
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In September 1984, I left university with a degree in Zoology and started work in the City of London. Over the next twenty five years most of my career involved managing UK equity portfolios with Fleming Investment Management and Henderson Global Investors, for corporate and local authority defined benefit pension schemes as well as the reserve fund of a well-known charity. During 2009 I left full time employment and decided to take time out to consider the next stage of my career, whilst putting my years of experience to good use investing the family savings. I have thoroughly enjoyed the freedom of investing from home and in January 2012 I set up I set up www.JohnsInvestmentChronicle.com.