Learning Technologies Group PLC (LON: LTG) – Delivering robust financial performance despite Covid-19 uncertainties

Learning Technologies Group Plc (LON: LTG) is FTSE AIM UK 50 Index 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.

On 22 September 2020, the Company is expected to announce H1 FY20 results.

 (Source: Presentation, Company Website)

Key Fundamental Statistics

Industry Outlook Dynamics

The market opportunity for the Company is attractive due to the gap between current and future workforce capability in the competitive market. 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 2018 and 2025. The business software & service has a wide range of application in the finance, sales & marketing and human resource sector.

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 Prospects and Risk Assessment

LTG has established a unique set of capabilities with a wide range of services and partnerships. It operates within the rapidly growing learning and talent management markets. LTG has a high-growth business model with offices in the UK, Europe, North America, and Hong Kong. LTG is underpinned by a high proportion of recurring multi-year revenues, a strong balance sheet, and excellent cash generation.

The Company had made eight acquisitions in seven years, which reflects that LTG is well-positioned to capture the long-term structural growth opportunity. During 2019, the Company also completed the integration of PeopleFluent, which will provide a stable platform to scale the business further. Further, the acquisition of Open LMS on 31 March 2020, will enhance the earnings potential. The Company has been increasing recurring revenue, improving margins, and generating robust cash flows to deliver strong financial performance. The Board continues to see R&D as a core enabler of future growth.

(Source: Presentation, Company Website)

However, the growth trajectory can be impacted by several factors. The inability to integrate the acquired business successfully could lead to inefficiencies and can impact prospective returns. The financial risk related to interest rates and foreign currency fluctuations. The project overruns can impact profitability and margins. Also, there is a liquidity risk if they fail to meet debt obligations. Moreover, the Company can fail to acquire and retail the right talent amid Covid-19 and Brexit uncertainties.

Segment Analysis

LTG operates with three reportable segments - Content & Services, Software & Platforms, and Other division.

(Source: Annual Report, Company Website)

Geographically, it has quite a diversified client base.

(Source: Annual Report, Company Website)

Synopsis of Recent Developments

29 May 2020: LTG raised nearly £81.8 million in gross proceeds by issuing 64,395,648 new ordinary shares, which represented 9.6% of the issued ordinary share capital before the placing.

1 April 2020: The Company announced the closing the Open LMS acquisition as all the conditions had been satisfied.

Key Shareholders

Trading Update (for the six months to 30 June 2020, as on 23 July 2020)

The Company has delivered a robust performance in H1 FY20 and was in line with expectations. The Board anticipates Group revenues to increase approximately 2% in H1 FY20, but there is a slight decline in the underlying business due to the challenging COVID-19 trading environment. In March 2020, LTG acquired Open LMS, a market leading LMS (Learning Management System) with expertise in Moodle. The underlying adjusted EBIT for H1 FY20 increased to approximately £19.9 million as compared with the previous year (H1 2019: £19.5 million). Moreover, the Company has shown an increase in sales due to the adoption of digital-learning solutions accelerates.

The Company witnessed an initial downturn in the market for Breezy HR's recruitment software in mid-March 2020; however, it witnessed an uptick in new sales since mid-May 2020. Further, LTG has won some prestigious projects, with a US$1 million virtual-reality healthcare project for PRELOADED and the conversion of a classroom to online.

The Company has a strong operating cash flow and was ahead of management's expectations, with net cash of £77.9 million (includes net placing proceeds of £79.6 million received in June 2020), gross cash of £98.1 million and undrawn debt facilities of approximately £39.0 million. From the robust capital position, it will be capturing the benefits of the acceleration of structural trends towards digital learning and will take advantage of value-enhancing acquisition opportunities. The Company has also taken proactive measures to prioritise the strong liquidity and cash position of the Group.

Financial and Operational Highlights (for the twelve months ended 31 December 2019)

(Source: Company Website)

• For FY19, the Company reported strong top-line and bottom-line growth, with organic revenue growth in both the Software & Platforms and Content & Services divisions. Further, it has improved the operating margins.
• The Board stated that FY19 was a year of excellent progress, with strong earnings growth.
• LTG continued the track record of stable cash generation in 2019. The Company witnessed a good liquidity position, with net cash ahead of expectations and a robust balance sheet.
• During the six years since LTG listed on the London Stock Exchange, the Company has delivered CAGR (compound annual growth rate) of 57% in adjusted diluted EPS.

Financial Ratios – Strong Profitability Margins versus the Industry Median 

EBITDA margin for the financial year 2019 was higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. On the liquidity front, Learning Technologies Group Plc’s current ratio was lower than the industry median of 1.22, but it has sufficient liquidity to meet short-term obligations and shows a robust liquidity profile to tackle the uncertainty due to COVID-19 outbreak. On leverage front, the debt-equity ratio was 0.29x, which was lower as compared to the industry median of 0.43x, reflecting that the Company is less leveraged as compared to the industry.

Share Price Performance Analysis

Daily Chart as on 1 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 1 September 2020, (before the market close, at 10:16 AM GMT+1), Learning Technologies Group Plc shares were trading at GBX 150.50, down by 0.99% against the previous day closing price. Stock 52-week High was GBX 174.40 and Low of GBX 97.00, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading above the short-term support level of 20, 50 and 100-day simple moving average price. MACD line is placed above the central line, indicating a bullish setup.

Learning Technologies Group Plc Vs FTSE AIM UK 50 Index (1 Year)

(Source: Refinitiv, Thomson Reuters)

In the last one year, Learning Technologies Group Plc share price has delivered 15.60% returns as compared to 10.40% returns of FTSE AIM UK 50 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 Ascential Plc (Price/NTM Earnings was 30.11x), Alta Financial Software Holdings Plc (Price/NTM Earnings was 53.08x), GB Group Plc (Price/NTM Earnings was 49.71x), and Team17 Group Plc (Price/NTM Earnings was 42.72x). The Average of EV/NTM Sales of the Company’s peers was 43.91x (approx.).

Business Outlook

Given the track record of strong margins and experienced leadership, LTG has proven that it can successfully grow the business organically and through strategic acquisitions. It has comprehensive and industry-leading capabilities to serve the diversified base of clients. The Company has already been progressively increasing the proportion of recurring revenue, EBIT margins, and return on capital employed over the years.

Going forward, the acquisition of Open LMS will enhance the earnings potential further. It has a strong balance sheet, and substantial cash resources to navigate through the short-term challenges presented by Covid-19 pandemic. 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 has already delivered a good start to the FY20 and they have not witnessed any material impact of COVID-19 on the performance. Nevertheless, the Board is adopting a prudent approach to shareholder distributions amid Covid-19 uncertainties and therefore, it postponed the final dividend.

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

Considering the strong financial performance, good liquidity position, lower debt-equity ratio, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Learning Technologies Group at the current price of GBX 150.50 (as on 1 September 2020, before the market close at 10:16 AM GMT+1), with lower-double digit upside potential based on 43.91x 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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