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Edmond Jackson's Stockwatch: Tribal Group
By Edmond Jackson | Wed, 02/01/2013 - 01:00
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Directors' share buying in education and training, software and services outfit Tribal Group (TRB), in context of a three-year growth strategy "now beginning to show encouraging momentum", is interesting to follow while its FTSE SmallCap shares are modestly rated for earnings.
Despite rising from 44p to 102p during 2012, at 102p Tribal remains a recovery play due to a restructuring after pre-tax profit plunged from £17 million in 2008. Since a £6 million low in 2010 the medium-term profit trend is improving, albeit with a slight dip to about £10 million expected for 2012 amid investment.
Regular small-lot buying around 100p in recent months is not the same as an outright decision to deploy cash versus a specific market price; last June several directors agreed to make regular purchases of shares. However, like option grants, they would not do this at all without belief it is to their long-term financial advantage.
While the current outlook can hardly be described as spicy, if Tribal's three-year development plan evolves then it is possible to see upgrades. Quite often in restructuring/recovery plays, analysts are conservative having been dealt nasty surprises.
|Year ended 31 December||2007||2008||2009||2010||2011||2012||2013|
|FRS3 pre-tax profit (£m)||1.57||17.1||-17.8||-0.41||3.74|
|Normalised pre-tax profit (£m)||13.3||16.9||12.9||6.26||11.3||10||11.7|
|FRS3 earnings/share (pence)||-3.45||13.4||-23.9||-0.5||3.5|
|Normalised earnings/share (p)||10.4||13.2||10.1||6.6||11.6||8||9.3|
|Cash flow per share (p)||11.9||24.8||15.6||21.1||11.1|
|Capex per share (p)||5.88||6.29||4.35||5.97||4.78|
|Dividend per share (p)||3.21||4.65||4.5||4.6||1.05||1.1||1.24|
|Net tangible assets per share (p)||-13.1||-27.2||-32.4||-35.4||-34.6|
|Source: Company REFS.|
Tribal's valuation model emphasises earnings, on a forward price-earnings multiple of about 11 times, because the prospective yield is only about 1% (if well covered over seven times by forecast earnings) and the balance sheet has negative net tangible assets due to £72.6 million capitalised goodwill. This reflects historic acquisitions of "people and intellectual property" type businesses, although an excess of current liabilities over current assets also contributes to negative net tangible assets. The first-half 2012 results showed current assets at £34.9 million, with £6.3 million cash, versus £51.4 million current liabilities, with accruals and deferred income expanding. This deficit had expanded from £6.3 million at end-June 2011 to £16.5 million, although it looks manageable.
On a two-year view, unless UK public spending cuts eat significantly into educational and training budgets, Tribal looks well placed. Management has described 2012 as "a period of investment for the future" creating additional sales capacity and software development, aligned to both domestic and international opportunities. These involve working in partnership with schools, universities, local authorities and government departments.
While 88% of 2011 turnover was UK derived, the remainder split between Australasia and rest-of-world, international revenues grew to 16% in the first half of 2012 and in North America both student management systems and bespoke systems for the US Department of Defence offer scope. In technology, the UK has seen a recovery in new student management systems although the services side - such as inspections - remains subdued. First-half revenue was split £25.1 million to technology versus £32.5 million for services, with operating profit at £4.7 million and £1.6 million respectively.
The interim cash-flow statement turned positively, with £5.6 million cash generated from operations versus £6.7 million consumed in the first half of 2011, and investment in product development rose from £1.6 million to £3.0 million. Over £11 million proceeds from the sale of discontinued operations was applied in 2011 to reduce borrowings and by end-June 2012 the debt (all long-term) was £19.5 million, which created £1.9 million interest costs versus £11.3 million operating profit.
So Tribal is improving its profile after being over-borrowed and operationally over-extended.
A November trading update for the period since end-June reiterated good progress, with the technology side enjoying new opportunities, and services "performing as anticipated" amid international potential, albeit a quieter domestic environment. The order book "remains strong" at £175 million, although the same statement in 2011 cited £176.6 million at end-October 2011 and £180.2 million at end-June 2011, so the trend in committed income is slightly declining, also when inflation is considered.
It does however represent about 160% of annual turnover, which helps to underpin forecasts. At the interim stage, management said profits were likely weighted towards the second half of 2012 and on the basis of last January there should be a pre-close update at the end of the second week.
Currently completing is the acquisition of International Graduate Insight, an education benchmarking and student experience research group for a maximum £7.5 million over three years, which is expected to be earnings enhancing in 2013. Its integration is described as likely beneficial to both firms.
Company REFS shows W H Ireland and Canaccord Genuity published "buy" notes on 20 December, each looking for 2013 earnings per share of 9.6p - ahead of others anticipating about 9p last November. This illustrates my point about scope for upgrades when sentiment is cautious and a growth programme is underway. Obviously much still depends on customer spending patterns, but W H Ireland reiterates its share price target of 135p.
Although Tribal's asset backing and yield are less comforting, should growth be constrained, it is worth bearing in mind that whatever the short to medium-term outlook, this group is becoming a useful takeover target for the likes of Capita (CPI) or Serco (SRP) now FTSE 100-listed support services groups themselves need to secure growth appeal while facing customers' constrained budgets.
For more information see tribalgroup.com.
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