Tribal stock (TRB LN): The Tribe got new chief

Unloved and under-covered restructuring themed stock with high revenue visibility, decent margins.. and a history of over expansion. New management got skin in the game and promises to set things straight.
Business: TRB stock is ‘the SAP’ software for universities, manages all aspects of learning experience from admission to tuition, learning and monitoring. Revenue is split 58% in software related activities and 42% in service related activities. Tribal operates in the UK, APAC and Africa. Significant customers: University of Bristol, TAFE Queensland, British Council
tribeWhat happened: Over expanded, grabbing bigger projects than what can handle. Dealing with universities and the public sector involves planning uncertainties as slow authorization progress could cause delays.  According to the recently published annual report: “Tribal experiences operational challenges on large projects for the Student Administration and Learning Management (SALM) programme in New South Wales and the TAFE Queensland programme, resulting in slower revenue and cashflow” A series of bolt on acquisitions magnified the liquidity problem once the new entities failed meet expectations.

Tribal share price: a disaster .. but underlying business still alive

gpo

faRights issueAims to raise up to GBP 21m to reduce net debt
1 for 1 rights issue of 94,849k shares @ 22p, underwritten by Investec, at 32% discount at announcement date.
Rights expire on 18th of April 2016, new shares to be admitted on 24 April, doubling the sharecount from current 94,846kKey dates: 29 April last day of dealings on main market, 3rd of May will start trading on AIM
Skin in the game: CEO subscribes to 250k, NEDs 1.25m. CEO appointed in Feb ’16.
Restructuring:
Disposal of non-core Sydney business for GBP 20.2m
GW impairment of GBP 38.8m, produce development of GBP 8m written down
CFO Steve Breach indicated his intention to stand down and pursue other interests, will remain on the board and the process to appoint his successor has commenced by recently appointed CEO Ian Bowels
Outlook: the board expects an improvement in 2016 and results to be weighted towards the second half of the year.
Guidance: (p14 FY15 Annual Report) EPS at 17p, increasing OP margin to 16% v current 3% via cost cutting. Orderbook: bullish GBP 121m v 102m last year.

Results: FY15 Revenue down to GBP 106m v 124m yoy with EBITDA GBP 8.2m v 19.7m yoy. Reported Loss GBP 47m but relates to write-offs / impairments
International revenue remains a key driver, 32% of business and management aims to increase it to 50%. Recurring revenue from services makes 28% of total
Net Debt rocketed to GP 32.5m v 12m yoy to fund acquisitions and software development
Headcount: employs 1,323 people (flat yoy), 600 of them in product development and 232 in central services (hmm..)
Cashflow was a disaster, turning from a positive freecasfhlwo of GBP 12.7m into negative GBP13.9m attributed to: GBP -4m in negative operating cashflow due to slower receipts, GBP 6.7m CAPEX and GBP 4.5m on M&A (old habits die hard, in FY14 alone spent GBP 15.1m on acquisitions)
Directors’ Remuneration: perhaps executive remuneration was overly generous, awarding 7 figure sums and awarding full bonuses in the go-go years of ’11 ‘12. Conversely a 14% of shareholders disapproved remuneration onMay ’15 AGM   Hopefully the new CEO’s interests are better aligned with shareholders.
Top shareholders: include the activist Crystal Amber with 6%, Majedie 5% , Schroders 11%, Henderson 5%
Auditor: Deloitte, gave greenlight, setting materiality at GBP 470k. Key Risks:
– Loan refinancing if capital raising fails
– Goodwill impairment (opening balance was GBP 78m  – a trace of the M&A excesses of the past) took a GBP 39m impairment hit.
Current balance GBP 38.3m + GBP 14.7m ‘other Intangibles’= GBP 54m ‘hot air’ assets, quite material if we consider the Book Value is only GBP 6.1m and market cap GBP 46m
– capitalization of development costs (will these internal investments bare fruit?), currently worth GBP 6m though took a GBP8m  impairment hit
– Revenue recognition: risk of recognizing revenue pre-maturely like iSoft or Autonomy
Working capital: Receivables appears reasonable, given the long payment cycle in the public sector
Leverage: if they manage to turn around the business and improve NI margin back to ’12, ’13 levels then Tribal could achieve a GBP 20m EBITDA, setting current net debt at a comfortable x1.6 EBITDA
Valuation:
Current EV: Market cap + Net Debt + Right’s issue = 46+32 +21 = 99m, say GBP 100m
for a business that last year generated Revenue GBP 106m and a recovering margin.
or EV/EBITDA x5 for a business taping into the growing demand for education services.

3 comments

  • In principle this has the making of a classic recovery stock. I am pretty sure that the major shareholders, (you omitted to mention the highly rated Strategic Equity Capital) have played a major behind the scenes role in recruiting the new chairman, senior NED and CEO, as well as having some influence on the £20m sale of the subsidiary to Servelec where the new chairman and senior NED hail from. That gives me some comfort, as does their sizeable personal investment in the capital raising. But I am uneasy about what is going on in Australia, where Tribal has expanded rapidly. Judging by comments on ADFVN, which sourced official papers down-under, some of Tribal’s big projects have run into serious and as yet unquantifiable trouble. Hopefully the new management can sort this out but the Australia exposure makes it too high risk for me.

  • This will likely recover – they are highly embedded in universities giving pricing power.

    Not worried on ADVFN – the same report on Australia issues blames management of the project… Long way to go from non working system to Tribal failed to perform according to contract and needs to pay money back. I work in this area and would be surprised if a new system did work…

    They have also been appallingly managed wasting far too much on M&A – a common theme….

    My post is here….

    https://deepvalueinvestments.wordpress.com/2015/12/21/tribal-trb-recovery-play-cheap-business-with-a-defendable-moat/

    • my only worry is if a new technology comes outpacing them, they were slow to join the cloud technology and the Software As A Service move..
      I started looking at GOAL LN and Laura Ashley hmm

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