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Schrole Group (ASX: SCL) – Targeting fast growing international schools

Article written by Pitt Street Research. For the full report click here

Suite of digital solutions with massive cross-sell potential

SCL’s Connect platform is an online recruitment management tool that filters SCL’s teacher database according to international schools’ specific requirements. The subscription-based model also provides teachers with the option of applying for best-fit job opportunities.Through the Schrole Cover platform, schools can search and recruit temporary replacement teachers and ad hoc workforce. Teachers looking for casual/temporary job opportunities can also use the platform to search for suitable schools.

SCL’s latest solution, Verify (launched in 2018), is a customized tool for teacher background verification. Launched in collaboration with the global leader of background verification process, First Advantage, Schrole Verify provides international schools with the option of getting background screening done within SCL’s platform. It also provides opportunities to candidates to proactively get their background verification done, which subsequently speeds up their recruitment process. These solutions provide a unique range of services within the same system and offers massive cross-selling opportunities for SCL.

Partnerships with global leaders offer huge market opportunities

Recently, SCL made two strategic alliances that give it massive outreach to international schools and educators, along with a new business approach. (I) SCL formed a wholly owned JV with International School Services (ISS), a nonprofit global leader that provides support services to international schools. Through this JV, SCL is gaining access to ISS’ network of 250+ schools and thousands of teachers. (II) SCL has formed an exclusive alliance with First Advantage to be its sales agent for international schools across the Asia Pacific (APAC) region. As candidate screening is paramount in all international schools, this partnership provides SCL with a new revenue stream that is easily scalable globally.

Tapping into the fast-growing market for international schools

SCL has built an attractive suite of recruitment and verification solutions for the fast-growing international schools’ market. The attractiveness and growth in this market is illustrated by the recent acquisition of the Cognita group of international schools by Private Equity firm Jacobs for GBP 2BN, or 26x EBITDA. Cognita only started in 2004 and already runs 70 schools in 8 countries educating 40,000 students. This type of fast growth of international schools is witnessed across the APAC markets, driven by emerging middle classes wanting better education for their children.

Additionally, SCL’s strategic partnerships with ISS and First Advantage allow SCL to leveragethis suite of solutions across a very substantial range of clients and prospects. 2019 will be the first full year in which SCL will be leveraging its new partnerships. And while we have incorporated the anticipated revenue synergies and cross-sell opportunities into our financial model, we believe there are likely to be further market opportunities SCL can address going forward.

The 2019 Northern hemisphere academic year, that has just started, is the first in which SCL will be leveraging its new partnerships. We believe there are likely to be significant further market opportunities SCL can address beyond the anticipated revenue synergies and cross sell opportunities we have incorporated into our financial model.

Turning profitable during FY21, but cash flow positive from FY19

Revenue recognition rules require SCL to defer approximately 50% of its annual revenues into the next financial year. Consequently, given the company’s strong revenue growth trajectory inthe next five years, top line revenue is understated in each of those years resulting in a few more years of losses until FY21. We expect SCL to turn profitable during that financial year.

Starting coverage with a BUY rating and A$ 0.037 price target

Our initial price target of A$ 0.037 per share, is a blend of DCF and relative valuation methods. Given the large share price upside from today’s level, we initiate our coverage of SCL with a Buy rating.

Digital solutions for staffing in international schools

The education sector, aided by technology, is at a tipping point with accessibility, efficiency, and cost of delivery expected to improve rapidly over the coming decade. SCL offers enhanced efficiency of recruitment, background verification and replacement cover in the fast- growing international school ecosystem by leveraging its data analytics-based online platforms. As the number of international schools is expected to double over the next 10 years and 80,000 teacher placements are forecast every year (as per ISC research), SCL is set to capture the enormous opportunities offered by this market.

Roots in vocational training

SCL began its journey in 1994 (Figure 1) when it first established the ETAS business. As a vocational training organization, SCL was largely catering to the Australian mining sector. The group later diversified into leadership and management training. ETAS’ business growth was gradual, but it was severely impacted in 2015 and 2016 due to a downturn in the mining sector and the tightening of regulations for vocational training across the country. Sensing the need to diversify, SCL ventured into the candidate management industry for international schools and commenced operations of its recruitment software solution business (Schrole) in July 2013.

The SCL Group, as it is known today, was established in November 2015 through the consolidation of ETAS and Schrole. The company was renamed Schrole Operations in July 2017 and was acquired by Aquaint Capital Holdings (a listed investment management company) in October 2017. Post the acquisition and raising of A$ 6M in fresh capital, Schrole Group commenced trading on Australian Securities Exchange (ASX).

Recruitment software and vocational training

SCL operates through two verticals, recruitment software and vocational training, backed by itsmanagement’s industry expertise in the education sector (MD & CEO Robert Graham has ~30years of experience, including as an international school principal and recruitment consultant).

Recruitment software for international schools

SCL offers hassle-free digital solutions for recruitment, replacement, and verification to international schools, through its various online platforms:

  • Schrole Connect/Advantage is a Cloud-based Software-as-a-Service (SaaS) platform, which provides candidate management solutions to international schools.
  • Schrole Cover is a Cloud-based SaaS platform that offers a solution for casual/part- time/replacement staff for the education, health, age care and hospitality sectors.
  • Schrole Verify provides comprehensive background screening services for schools as well as teachers

SCL’s technology leads to superior outcomes for schools

The Advantage platform connects schools with teachers more efficiently

Schrole Advantage is a cloud-based SaaS platform that eases the hiring process for recruiters (international schools) and candidate teachers (>60k sourced from 181 countries). It also aids schools in promoting roles, receiving applications, and managing teacher candidate information. The algorithm – which is custom designed by education experts to suit the requirements of international schools – rates and ranks candidates and simplifies the recruitment process for school administrators. Following the strategic partnership with ISS, SCL has upgraded its offering and renamed it ‘ISS-Schrole Advantage’.

Main Features:

  • Advantage provides multiple channels for recruiters to interact with candidate teachers, including online portals, fairs, apps and virtual events.
  • It finds the best fit for an opening using its advanced search algorithm (to be significantly updated through its partnership with Edith Cowan University) with superior matching capabilities (Smart Match). The algorithm is based on data analytics principles, wherein the requirements of schools (generated based on a set of questions) are matched with candidate profiles (generated based on answers provided by candidates for specific school-based questions asked during the application process).
  • It offers a search algorithm supported by a database wherein candidates’ references arerated and ranked. However, unlike the conventional norm where references are generated based on a 1–10 scoring, a rubric of performance measures is used to generate a reference score. This enhances the efficiency of the search algorithm by providing a more representative score.
  • Advantage also offers social media marketing for schools to advertise their vacancies.
  • It has a user-friendly interface – internal messaging system (similar to LinkedIn), and checks and balances to avoid creation of duplication of vacancies.
  • Advantage also offers a highly secure database – sophisticated encryption of details on a separate authentication server.
  • Option to integrate other services offered by SCL – Verify and Cover – with the Advantage platform, thereby enabling cross-selling.

SWOT Analysis

Strengths

  • Business model and pricing strategy: While most traditional recruitment agencies are positioned as service providers, Connect/Advantage is offered as a product (subscription- based model), characterized by a relatively sticky customer base and a stable revenue stream. Additionally, the subscription model is cost-efficient for customers vs. the traditional agent model, thereby increasing the attractiveness in terms of pricing.
  • Superior product offerings: Backed by the ISS deal, Schrole Connect has the most comprehensive channel mix (online portal, fairs, apps, and virtual events) among international school recruitment agencies. Connect’s intelligent algorithm, which enhancesthe efficiency of teacher recruitment (‘smart match’) and Verify’s comprehensive background screening process (including criminal screening) are key product differentiators.
  • Growth acceleration through partnership: Management’s strategy to partner with market- leading firms (ISS and First Advantage) to tap their network strength and technical competence, is a prudent approach to accelerate market share gains in a fast-growing market. ISS’ track record (working in the field of international education since 1955) is likely to boost the brand perception of Schrole Advantage.
  • Highly scalable offering: The software product suite (Connect, Cover) is SaaS-based and hence is quickly deployable without much personnel requirement for installation and support.
  • Management experience: MD & CEO Robert Graham has ~30 years of experience –including as an international school principal and recruitment consultant. Management’sindustry understanding enables SCL to tailor its products according to the needs of international schools.
  • Strong traction achieved: In terms of customer acquisition, the number of Connect licenses has more than doubled to 157 since 2016, and Cover licenses have reached 143 within 2.5 years of inception. Further, the newly launched Advantage platform has been well-received with 40% of renewing customers opting for Advantage.

Weaknesses

  • SCL continues to remain loss-making in the next few years due to high R&D and marketing costs. Though travel expenses are likely to moderate (aided by ISS deal), business expansion costs are expected to remain elevated in the near to medium term.
  • Though SCL has an operational history of ~25 years in the education sector (ETAS), its track record in the EdTech space is limited (~5 years).
  • Although management has commenced efforts to geographically diversify the revenue base of ETAS, it remains highly exposed to the volatilities of the Australian mining sector.

    Opportunities

  • Growth in international schools to drive Connect demand: Driven by growing income levels in APAC and increasing preferences for Western-style international curriculums, the number of international schools is expected to nearly double to 17,100 over the next decade.
  • Scope for deployment of Cover across industries: Cover’s software is industry-agnostic and is well-positioned to be deployed in other industries by capitalizing on the high casual labor levels in the Australian market.
  • Verify powered by raising awareness: Given the quality standards expected by international schools and increasing awareness around child protection, demand for background screening is expected to remain firm among international schools.
  • Huge opportunity to cross-sell: Given the complementary nature of the software product suites and expected integration of Verify with Advantage platform, there is a sizable opportunity to cross-sell.
  • Option to expand the geographic reach of Verify: SCL is the preferred sales and marketing partner if First Advantage chooses to expand Verify beyond the APAC region.

     Threats

  • SCL faces strong competition from incumbent players in the Connect and Cover verticals. Though brand equity and network strength of ISS is expected to moderate the impact, competitive pressures are expected to remain strong.
  • The Australian vocational training industry has become highly regulated in the aftermath of the crackdown on sector-wide irregularities in 2016.
  • The partnership with leading background verification service provider ‘First Advantage’ isthe backbone of Verify. Any partnership between traditional recruitment agencies andleading background verification providers to mimic Verify’s offerings may erode the product differentiation of Verify.

Valuation: Long-term value clearly exceeds current price

In order to derive SCL’s long-term value, we have used a weighted average valuation methodology, giving equal weight to a peer-group-based Sum-Of-The-Parts (SOTP) valuation and Discounted Cash Flow (DCF) calculation.

Peer-group-based SOTP valuation suggest a fair value of A$ 0.044 per share

Considering the distinct nature of SCL’s different segments, one single peer group would be ineffective in valuing SCL. We have used three distinct peer groups to value the three main businesses, i.e. recruitment solutions (both the Connect and Cover platforms), candidate verification (Verify) and the vocational training business (ETAS).

We have used a mix of ASX-listed and APAC-listed companies to value the diversified business segments. As far as ASX-listed companies are concerned, we believe Xref Limited (ASX: XF1) and CV Check (ASX: CV1) are the closest competitors in the verification business. For the purpose of valuing the ETAS business, we have included the following Australian education eers: IDP Education (ASX: IEL), Navitas Limited (ASX: NVT), RedHill Education (ASX: RDH), G8 Education (ASX: GEM), and Think Childcare (ASX: TNK).

DCF calculation suggests substantial long-term upside

Our DCF model yields a WACC for SCL of 9.96% (risk-free rate of 2.7%, a Beta of 0.97 and an equity risk premium of 7.7%. Applying that discount rate to our free cash flow projections through 2027 and using a terminal growth rate of 2%, SCL yields a value of A$ 0.029 per share (Figure 29).

Even though there is execution risk associated with SCL’s strategy currently, we believe that as the company matures and approaches EBITDA breakeven, there will be room for lower discount rates, which would translate into higher share price values.

Schrole+Group+initiating+research+report+18+09+18

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Pitt Street Research work is commissioned by the listed companies it covers, and Pitt Street Research has received or will receive payment for the preparation of such work. Please refer to the bottom of the research notes as published on Pitt Street Research’s web site for risks related to the companies being covered, as well our General Advice Warning, disclaimer and full disclosures. Also, please be aware that the investment opinion in this report is current as at the date of publication but that the circumstances of the company may change over time, which may in turn affect our investment opinion.



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