Learning Technologies Group (LTG) has released a strong trading update with FY17 profits and year-end net cash comfortably ahead of consensus. The update indicates that operating margins were c 190bp ahead of our forecasts, with net cash £7.9m ahead. However, we are maintaining our FY18/FY19 forecasts, which were recently updated in our monthly book. In October, LTG announced its objective to double run-rate revenues to £100m and achieve run-rate EBIT of at least £25m by the end of 2020. While the shares look punchy on c 37x our FY18 EPS, the business is attractively positioned in an industry growing at 15-20% and we note that sustainable high-teen growth opportunities are hard to find across the broader market.
Written by
Learning Technologies Group |
FY17 profit and cash generation beat forecasts |
Trading update |
Software & comp services |
22 January 2018 |
Share price performance
Business description
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Learning Technologies Group (LTG) has released a strong trading update with FY17 profits and year-end net cash comfortably ahead of consensus. The update indicates that operating margins were c 190bp ahead of our forecasts, with net cash £7.9m ahead. However, we are maintaining our FY18/FY19 forecasts, which were recently updated in our monthly book. In October, LTG announced its objective to double run-rate revenues to £100m and achieve run-rate EBIT of at least £25m by the end of 2020. While the shares look punchy on c 37x our FY18 EPS, the business is attractively positioned in an industry growing at 15-20% and we note that sustainable high-teen growth opportunities are hard to find across the broader market.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
19.9 |
3.9 |
0.76 |
0.15 |
98.6 |
0.2 |
12/16 |
28.3 |
6.4 |
1.18 |
0.21 |
63.2 |
0.3 |
12/17e |
52.2 |
13.0 |
1.93 |
0.28 |
38.7 |
0.4 |
12/18e |
56.3 |
14.6 |
2.02 |
0.38 |
37.0 |
0.5 |
Note: *PBT and EPS (fully diluted) are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Trading update: Surprise early swing into net cash
FY17 revenues were at least £51.8m (we forecast £52.2m) while adjusted EBIT was not less than £14m (we forecast £13.1m), implying operating margins were 27.0% (25.1%) and the company has a record order book. The group ended the year with net cash of c £1.0m (we forecast net debt of £6.9m). We believe the high levels of cash were due largely to Q4 licence sales at Rustici and NetDimensions (that invoices significant recurring software licences in Q4), as well as the exercise of employee share options and cash conversion came out at the higher end of the target range of 80-90%. Further, LTG says it has “an encouraging pipeline of international acquisition opportunities as it seeks to diversify and deepen its strategic consultancy, creation, delivery, and analytics offering...”
Forecasts: FY18/19 maintained for now
We have brought our FY17 operating profit and balance sheet forecasts into line with the update and maintain our revenue forecast, which is very slightly ahead of the update. We maintain our FY18 and FY19 revenue and profit forecasts, although the year-end net cash position rises by £6.7m and £6.8m respectively. The contract change announced late last year, which resulted in revenue accelerating by c £1.7m, will act as a headwind in FY18, while the introduction of IFRS 15 (revenue recognition) could result in a small reduction in revenues and profit.
Valuation: Punchy, justified by high-teen sales growth
While the rating looks punchy at c 37x in FY18e falling to 32x in FY19e, the investment case is supported by strong industry dynamics with the corporate e-learning industry growing at c 15-20%. Our DCF model, when incorporating 15% organic growth over 10 years and 30% operating margins from FY19, suggests a valuation of 72-100p when applying WACCs of 11% and 9%. Further acquisitions could also increase the company’s scale and enhance earnings.
Exhibit 1: Financial summary
£'000s |
2014 |
2015 |
2016 |
2017e |
2018e |
2019e |
|
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
|
|
|||||
Revenue |
|
14,920 |
19,905 |
28,263 |
52,196 |
56,326 |
59,470 |
EBITDA |
|
2,225 |
4,338 |
7,672 |
15,283 |
16,984 |
18,966 |
Adjusted Operating Profit |
|
1,965 |
3,908 |
6,947 |
14,003 |
15,163 |
16,902 |
Amortisation of acquired intangibles |
(570) |
(1,203) |
(3,200) |
(6,000) |
(6,000) |
(6,000) |
|
Exceptionals |
(621) |
(665) |
(3,773) |
(4,200) |
(3,000) |
0 |
|
Operating Profit |
774 |
2,040 |
(26) |
3,803 |
6,163 |
10,902 |
|
Associates |
(160) |
(62) |
(205) |
(400) |
0 |
500 |
|
Share based payments |
(583) |
(776) |
(605) |
(700) |
(800) |
(900) |
|
Net Interest |
(158) |
12 |
(357) |
(650) |
(650) |
(600) |
|
Profit Before Tax (norm) |
|
1,647 |
3,858 |
6,385 |
12,953 |
14,513 |
16,802 |
Profit Before Tax (Statutory) |
|
(127) |
1,214 |
(1,193) |
2,053 |
4,713 |
9,902 |
Tax |
(35) |
(258) |
(133) |
(1,803) |
(2,322) |
(2,812) |
|
Profit After Tax (norm) |
1,612 |
3,034 |
5,385 |
11,150 |
12,191 |
13,990 |
|
Profit After Tax (Statutory) |
(162) |
956 |
(1,326) |
250 |
2,391 |
7,090 |
|
Average Number of Shares Outstanding (m) |
332.03 |
373.51 |
418.62 |
546.77 |
573.28 |
576.14 |
|
EPS - normalised (p) |
|
0.49 |
0.81 |
1.29 |
2.04 |
2.13 |
2.43 |
EPS - normalised & fully diluted (p) |
|
0.46 |
0.76 |
1.18 |
1.93 |
2.02 |
2.31 |
EPS - Statutory (p) |
|
(0.05) |
0.26 |
(0.32) |
0.05 |
0.42 |
1.23 |
Dividend per share (p) |
0.10 |
0.15 |
0.21 |
0.28 |
0.38 |
0.52 |
|
|
|
||||||
EBITDA Margin (%) |
14.9 |
21.8 |
27.1 |
29.3 |
30.2 |
31.9 |
|
Op Margin (before GW and except.) (%) |
13.2 |
19.6 |
24.6 |
26.8 |
26.9 |
28.4 |
|
BALANCE SHEET |
|||||||
Fixed Assets |
|
12,337 |
19,502 |
45,558 |
87,553 |
82,802 |
77,860 |
Intangible assets and deferred tax |
11,982 |
18,959 |
41,667 |
83,311 |
78,505 |
73,632 |
|
Tangible Assets |
339 |
543 |
708 |
1,059 |
1,114 |
1,045 |
|
Investments & other |
16 |
0 |
3,183 |
3,183 |
3,183 |
3,183 |
|
Current Assets |
|
9,263 |
13,913 |
14,214 |
29,369 |
37,127 |
45,484 |
Stocks |
0 |
0 |
0 |
0 |
0 |
0 |
|
Debtors |
4,905 |
6,608 |
8,866 |
13,637 |
14,716 |
15,537 |
|
Cash |
4,358 |
7,305 |
5,348 |
15,732 |
22,411 |
29,947 |
|
Current Liabilities |
|
(5,184) |
(6,146) |
(13,058) |
(21,791) |
(22,949) |
(23,832) |
Creditors |
(5,184) |
(6,146) |
(9,806) |
(18,539) |
(19,697) |
(20,580) |
|
Short term borrowings |
0 |
0 |
(3,252) |
(3,252) |
(3,252) |
(3,252) |
|
Long Term Liabilities |
|
(2,007) |
(2,125) |
(16,004) |
(16,904) |
(16,904) |
(16,904) |
Long term borrowings |
0 |
0 |
(10,582) |
(11,482) |
(11,482) |
(11,482) |
|
Other long term liabilities |
(2,007) |
(2,125) |
(5,422) |
(5,422) |
(5,422) |
(5,422) |
|
Net Assets |
|
14,409 |
25,144 |
30,710 |
78,227 |
80,075 |
82,608 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
936 |
4,735 |
3,021 |
13,755 |
13,847 |
16,033 |
Net Interest |
4 |
12 |
(274) |
(650) |
(650) |
(600) |
|
Tax |
(32) |
(483) |
(645) |
(1,200) |
(1,619) |
(2,186) |
|
Capex |
(321) |
(542) |
(1,218) |
(2,949) |
(3,070) |
(3,122) |
|
Acquisitions/disposals |
(4,586) |
(7,779) |
(14,583) |
(46,739) |
0 |
0 |
|
Financing |
7,291 |
7,419 |
647 |
48,548 |
0 |
0 |
|
Dividends |
(107) |
(448) |
(712) |
(1,280) |
(1,829) |
(2,589) |
|
Net Cash Flow |
3,185 |
2,914 |
(13,764) |
9,484 |
6,679 |
7,536 |
|
Opening net debt/(cash) |
|
(1,170) |
(4,358) |
(7,305) |
8,486 |
(998) |
(7,677) |
Other |
3 |
33 |
(2,027) |
0 |
0 |
0 |
|
Closing net debt/(cash) |
|
(4,358) |
(7,305) |
8,486 |
(998) |
(7,677) |
(15,213) |
Source: Learning Technologies Group (historicals), Edison Investment Research (forecasts). Note: *The outflow in FY17 represents the cost of acquiring NetDimensions less assumed net cash position on acquisition.
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Research: TMT
Carclo has recently announced that its FY18 performance is likely to be lower than previously expected. This is because of contract delays affecting both the Technical Plastics (CTP) and LED Technologies (LED) divisions as well as a delay to the anticipated ramp-up in a non-medical project for CTP, which management expected would benefit H218. We reduce our FY18 and FY19 estimates, introduce FY20 estimates and revise our indicative valuation range from 177-187p/share to 145-154p/share.