Learning Technologies Group Plc – Operating with Strong Liquidity Position

Learning Technologies Group Plc (LON: LTG) is an AIM-listed company, which is engaged in the business of digital learning and talent management. The Group provides digital transformation services to large organisations. The Company is having operations worldwide, which includes Canada, Hong Kong, Brazil, Australia, Germany, the UK and the US. LTG aims to build a dynamic portfolio of international talent management business, digital learning and complementary businesses through robust organic growth and strategic acquisitions. The Group has a strong partnership network, which enables them to deliver expertise beyond capability. The Group has divided the operations into two reportable segments being Software and Platforms division and Content & Services division.


(Source: Company Presentation)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the Grand View research report, the global business software & service market size was around USD 322.91 billion in 2018, and it is expected to grow at a CAGR of close to 10.7% between 2019E and 2025E. The business software & service has a wide range of application in the finance, sales & marketing and human resource sector. IBIS World reported that the market size of software development in the UK was around £28.9 billion in 2018. Software development in the UK is expected to grow at a CAGR of approximately 6.2% between 2016 and 2020E to £32.8 billion. Global Market Insights reported that the global e-learning market size was over USD 200 billion in 2019 and it is expected to grow at a CAGR of close to 8% between 2020E to 2026E and will be more than USD 375 billion by 2026E. The other fastest-growing segment of the computer software and service industry includes Cloud Data, Artificial Intelligence, Machine Learning, Robotics and Blockchain.

Growth Catalysts and Risk Assessments

The Group has delivered a consistent growth rate trajectory in adjusted diluted EPS since the time of listing. It has continued to deliver increased revenues and also showed organic revenue growth in both the Software & Platforms and Content & Services divisions (excluding the acquired People Fluent business). LTG has further improved the operating margins and has continued to deliver decent cash generation. Emphasis is on generating profit from mature software businesses to invest in R&D and high-growth opportunities. The Board continues to see R&D as a core enabler of future growth. LTG has a high-growth business model with offices in the U.K., Europe, North America and Hong Kong. Open LMS acquired on 31 March 2020 has a strong sales pipeline in open-source LMS SaaS market. LTG is underpinned by a high proportion of recurring multi-year revenues, a strong balance sheet, and excellent cash generation. The Company had made 8 acquisitions in seven years, which reflects that LTG is well-positioned to capture the long term structural growth opportunity.


(Source: Company Website)

The Group’s financial performance is impacted by several risks and has divided the impact of different risks based on likelihood and financial impact on the business performance.

(Source: Annual Report, Company Website)
 
Due to the impact of Covid-19, the Company is primarily concerned about the downturn in the market, which could put financial stress on the business in the medium to long term. It may cause customers to delay or cancel projects, and some customers may delay payments. The Group is exposed to foreign currency risk on transactions and balances that are denominated in currencies other than Pound Sterling. Legal & Regulation and Conduct also pose as other significant risks for the Company. The Group needs to keep a close watch to protect any breach related to the regulatory requirement. Failure in cybersecurity and a critical data breach could affect the operations of the company as well as the reputation of the Group.

Business Strategy

The Group is focused on ‘buy and build’ strategy with an emphasis on expanding the geographical reach, particularly in the US market. The Group is also focused on developing a presence in highly-regulated areas such as oil and gas, energy, healthcare, pharmaceutical and aviation sectors.


(Source: Company Presentation)
 
Sales By Sector – Focused on Diversity for Strength

In the financial year 2019, LTG sells its services to multiple sectors such as automotive, Financial Services, Healthcare, Technology and Retail, etc.


(Source: Company Website)
 
Segment Analysis

The Group classified its business into Operating and Geographic segments. The operations are divided into two operating segments being Software and Platforms division and Content & Services division. The Software and Platforms business accounts for around 70% of the total revenue of the Company on a proforma basis. The Content & Services business includes services which are for shorter-term and are fixed-price projects.

The revenue and profitability highlights of the operating segments can be seen in the image below:


(Source: Company Website)
 
The Company also divides its business into geographic segments, which represents the areas in which it operates. The Group operates in six geographic segments being, UK, Mainland Europe, United States, Canada, Asia Pacific and ROW (Rest of the World).

The revenue and non-current assets highlights of the geographic segments can be seen in the image below:


(Source: Annual Report, Company Website)
 
Synopsis of Recent Developments

On 17 June 2020,  Learning Technologies Group announced that it had made an application for admission of 790,099 new shares after share options exercise for trading on AIM.

Key Performance Indicators


(Source: Annual Report, Company Website)
 
The Group’s primary KPI’s (Key Performance Indicators) are sales, profitability and cash flows. Sales are tracked through new contract wins, retention rates and upsells. Profitability reflects the profit earned from the divisions after reviewing the revenue and fixed cost base. The cash flow indicates the cash generation capability of the Company to meet working capital needs.

LTG delivered a CAGR (Compounded annual growth rate) of 59%, 80% and 57% for revenue, adjusted EBIT and diluted EPS, respectively, for a period of two years from 2017-2019.

Top Shareholders Statistics

Trading Update (for the six months to 30 June 2020) – Reported Decent Business Performance

The Group stated that it has delivered a robust performance in the first half of 2020 and was in line with internal expectations, despite the disruption caused by the COVID-19 pandemic. The Group expects to report revenues of at least £64 million, an increase of approximately 2%, with a slight decrease in the underlying business offset by a contribution from the newly acquired Open LMS business in Q2. It is also expected that the underlying adjusted EBIT for the period would be approximately £19.9 million (excluding non-cash items), up from £19.5 million in the year before.

The Company predicted the adjusted EBIT of at least £18.3 million (margin of 29%). The Group has derived approximately 75% of the revenues from recurring multi-year contracts as compared to the corresponding period of the last year (H1 FY19: 67%), and while some enterprise software procurement processes had been postponed. However, retention rates in the PeopleFluent and other software businesses hold up well. In Rustici and Open LMS business, the sales and revenues were also increasing, due to the adoption of digital-learning solutions capabilities.

Despite an initial downturn in the mid of March 2020, the new sales from the Company’s Breezy HR business have also seen a marked uptick. Meanwhile, the revenues from the Content & Services division has been subdued in Q2 FY20, due to some client projects were curtailed as a result of the pandemic. However, it had also won some prestigious projects comprising a US$1 million virtual-reality healthcare project for PRELOADED and the conversion of several classroom training programs to online and blended learning for LEO, which will be delivered in Q2 FY20. The Group’s operating cash flows were ahead of the management anticipations, with net cash of £77.9 million at the end of the period (31 December 2019: £3.8 million). LTG has undrawn debt facilities of approximately £39 million and gross cash of £98.1 million (31 December 2019: £42 million). On 22 September 2020, the Company will publish the half-year results.

Strategic and Operational Highlights (for the financial year ending 31 December 2019)

In April 2019, the Group announced the acquisition of Breezy HR (a fast-growing talent acquisition software business). During 2019, Breezy HR has delivered an exceptional growth. On 10 March 2020, LTG announced the proposed acquisition of the business and assets of Open LMS from Blackboard Inc for cash consideration of US$31.7 million, to be funded from the Group’s existing cash and bank facilities. This deal was completed on 31 March 2020. Open LMS acquisition provides the foundation in the open-source LMS market with numerous cross-selling opportunities. The Group has successfully launched the Instilled LXP and VectorVMS mobile app. It will provide the solutions that allow the clients to successfully manage all non-employee labour through the full sourcing and management lifecycle. Moreover, LTG has continued to invest in the product development roadmap and made encouraging progress in the cross-selling initiatives.

Financial Highlights - Strong Delivery and Robust Balance Sheet (31 December 2019)


(Source: Company Website)

The Company provided the full-year results for the twelve months ended 31 December 2019, with increased recurring revenue, improved margins, and strong cash generation. Led by the full-year contribution of the acquisition of BreezyHR in April 2019 and People Fluent (acquired in May 2018), the revenues surged by 39% to £130.1 million (2018: £93.9 million). Adjusted EBIT rose by 58% to £41 million in FY19 (FY18: £26 million), while adjusted EBIT margins increased to 31.5% in 2019 from 27.7% in 2018.  Adjusted diluted EPS jumped by 47% to 4.7 pence in FY19 (FY18: 3.2 pence). The Group’s net cash position at 31 December 2019 of £3.8 million was better than anticipated due to the substantial cash generation in the second half of 2019. It placed the Group on a sound footing to weather a downturn and remained well-positioned to invest in the selective M&A opportunities as they arise. In light of COVID-19 mayhem, the Board is adopting an effective approach for shareholder distributions and will postpone the final dividend until market conditions stabilise.

Financial Ratios – Decent Profitability Position and Robust Liquidity Profile in FY2019

In the financial year 2019, reported profitability metrics were in line with the last year data for the same period. The Group managed to show decent profitability and reflected better control over expenses. On the liquidity front, Learning Technologies Group Plc’s current ratio was lower than the industry median of 1.18, but the Group has sufficient current assets to pay short-term obligations. The Group managed to increase the liquidity as against last year comparatives. On leverage front, the debt-equity ratio was 0.29x, which was lower as compared to the industry median, reflecting that the Company is less leveraged as compared to the industry.  

Share Price Performance Analysis


Daily Chart as on 28 July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 28, 2020, at the time of writing (before the market close, at 8:34 AM GMT+1), Learning Technologies Group Plc shares were trading at GBX 123.00, down by 1.91% against the previous day closing price. Stock 52 week High and Low were GBX 174.40 and GBX 97.00, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Learning Technologies Group Plc Vs FTSE-AIM 100 Index (1 Year)


(Source: Refinitiv, Thomson Reuters)

In the last year, Learning Technologies Group share price has delivered 14.48% return as compared to negative 6.44% return of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last year.

Valuation Methodology

Price/Earnings Approach (NTM)

 

To compare Learning Technologies Group Plc with peers, Price/Earnings multiple has been used. The peers are GB Group Plc (Price/NTM Earnings was 45.49), Team17 Group Plc (Price/NTM Earnings was 38.92), Aptitude Software Group Plc (Price/NTM Earnings was 33.09), Auto Trader Group Plc (Price/NTM Earnings was 31.15) and Idox Plc (Price/NTM Earnings was 18.92). The Average of Price/NTM Earnings of the company’s peers was 33.51x (approx.).

Business Outlook Scenario

In the first half of 2020, the Group reported decent business performance updates with retention rates held up well despite the disruption caused by the Covid-19 mayhem. The Group acquired Open LMS, which complements the existing portfolio. Further, the Company said it has no material impact from the Coronavirus outbreak and enters the second half of the year with a robust financial position, with demand in line with the management expectations. In the first half of 2020, the Group expects to report revenues of at least £64 million and the underlying adjusted EBIT of approximately £19.9 million. Furthermore, the Company’s investment in future business would help in achieving further sales growth and operational efficiencies. Also, the market dynamics and recent trends offer ample opportunities on a continuing basis to stay ahead of the curve in terms of competitive positioning. Moreover, the Group is implementing a lot of cost-saving measures and expected to attain a combined cash savings of over GBP 20 million in the financial year 2020. The Company will be able to maintain a robust balance sheet and ensure access to ample liquidity, even in a severe downside scenario.

Learning Technologies Group Plc witnessed a CAGR growth of ~59.88% in revenue over the period of FY15-FY19 while net profit (from continued & discontinued) recorded a stellar CAGR growth of ~66.04% during the same period.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation at the current price of GBX 123.00 (as on 28 July 2020, before the market close at 8:34 AM GMT+1), with lower double-digit upside potential based on 33.51x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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