‘Looks cheap’: Leading equity researcher puts a buy on edtech Schrole

A leading equity research firm has put a buy on rapidly growing edtech specialist Schrole Group, finding the stock is undervalued with enormous growth opportunity.

Provider of global SaaS and training solutions for teachers and educational institutions Schrole Group (ASX:SCL) has released an equity research initiation report, highlighting a significant valuation discount and growth opportunity.

The report by RaaS Advisory showed SCL trades at a significant discount to the base case discounted cash flow (DCF) valuation of 3.5 cents per share.

Trading at near record lows at $0.009 per share with a market cap of $12.9m RaaS believes the share price has reached close to the bottom and “feel comfortable entering at current valuations which appear attractive”.

RaaS estimates SCL is trading on a 2x price to revenue multiple for 2022, “which looks cheap compared to small cap ASX listed SaaS peers which trade on an average of 8x price to revenue”.

Well-established with multiple growth options

SCL is positioned as a complete Human Resources Software as a Solution (SaaS) solution, which comprises recruitment, background checks, onboarding, relief teacher management and professional development, predominantly for the international and domestic education sectors.

The company’s flagship full SaaS product suite called “Schrole HR” comprises five Human Resources SaaS offerings, including Schrole Connect and Events, Verify, Engage (to be released Q1 2022), Cover, and Develop.

RaaS noted that there is no online platform other than Schrole HR which delivers the full suite of HR solutions for the whole teacher lifecycle within international schools, which is an important selling point of SCL’s technology.

“Most competing platforms are either recruitment focused, offer online fairs/events/seminars, or are focused on professional development,” the report noted.

International schools tend to highly value the quality of teachers, with teaching typically conducted in English. There is often an internationally recognised curriculum involved with a very expensive fee structure.

The report noted the usual staff tenure at a school will be 3-5 years, so there is a constant need to find new teachers and have a streamlined and effective recruitment process.

“Given the elite nature of the schools and staff within the sector, the industry ecosystem represents a very high value segment of the education sector where optimal outcomes and efficient systems and processes are required as critical business infrastructure.

“Positions available in the schools tend to be in high demand and roles advertised typically (attract) large/excess numbers of suitable applicants.

“The difficulty in properly screening applicants efficiently and securing the ideal candidate is the core value proposition of SCL’s business model.”

CEO Rob Graham launched SCL in its current form in 2013 as an HR software solution company developed and designed by educators for educators.

Graham had more than 20 years’ experience across six countries working with international schools as a teacher and principal and designed the software to address challenges experienced in the industry.

SCL started with two software products, Schrole Cover and Schrole Connect, designed to make life simpler for school administrators.

Today, SCL’s software is used by more than 500 schools. Its first online recruitment event, using its latest SaaS product offering Schrole Events, targeting Southeast Asia was held in late October and attracted ~1700 participants. Schrole has ~14 events planned through to April 2022 globally to coincide with the peak school hiring season.

The company is also looking to target the higher education sector and other sectors, including public and private hospitals. SCL’s training services (formerly ETAS) services the resources and government sectors as well as the international education market.

Revenue and margin growth opportunities

SCL has been on a growth trajectory and reported a solid performance across a range of value drivers for Q3FY21, including encouraging growth of 28% in September quarter cash receipts to $1.18m.

Strong upsell and cross-sell from existing customers with additional products is improving average revenue per client and margins.

SCL has targeted expansion in average contract value per customer from ~$10k pa to ~$30kpa through increased cross-sell of its new SaaS offerings.

SCL is targeting further growth through its expanded direct sales team selling in new geographies, previously restricted due a now terminated sales distribution contract with International School Services (ISS).

RaaS said it will “initiate research coverage with a BUY (High-Risk) rating on SCL”, noting it is financially stable and nearing cashflow breakeven, with margins set to improve significantly, and a low fixed cost base expected to remain stable.

The report noted a “key inflection point” for the business with strong revenue and client growth, profit margin expansion, and low fixed cost businesses model supporting the case for significant upside on any re-rate higher in SCL’s valuation.

This article was developed in collaboration with Schrole, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.