Learning Technologies Group PLC (LON: LTG) – FY20 is expected to be in line with market expectations.

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 Company provides digital transformation services to large organisations. It has operations worldwide, including Canada, Hong Kong, Brazil, Australia, Germany, the UK, and the US. It has divided the operations into two reportable segments being Software and Platforms division and Content & Services division. 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.

 (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

LTG has a high-growth business model with offices in the UK, Europe, North America, and Hong Kong. It 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. 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 FY19, the Company also completed the integration of PeopleFluent, which should provide a stable platform to scale the business further. Further, the acquisition of Open LMS on 31 March 2020, is likely to 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.

However, the growth trajectory can be impacted by various risks and uncertainties, such as business interruption and disruption caused by Covid-19, financial risk arising from foreign exchange fluctuations, and compliance with debt financing facility covenants. Moreover, the project overruns could lead to loss of margins and profitability for the Company. Also, the inability to integrate the acquired businesses successfully could lead to inefficiencies. Furthermore, there are operations risks pertinent to technology changes, increased competition, and failure to retain customer contracts. 

Industry Outlook Dynamics

As per Global Market Insights, the market size of global e-learning sector was valued over US$200 billion in 2019, and it is expected to grow at a CAGR of ~8% and will be more than US$375 billion by 2026. The other fastest-growing segment of the computer software and service industry includes Cloud Data, Artificial Intelligence, Machine Learning, Robotics and Blockchain.

Adjacently, 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 US$322.91 billion in 2018, and it is expected to grow at a CAGR of ~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.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Learning Technologies Group Plc.

Recent Developments

On 1 October 2020: The Company confirmed the completion of the acquisition of eCreators Pty Ltd, after satisfying all conditions and an initial cash consideration of A$5.5 million (approximately £3.1 million).

On 23 September 2020: Learning Technologies Group stated that Neil Elton, as a Chief Financial Officer, has exercised one million options over Ordinary Shares in the Company. These shares were sold at an average price of 128.46 pence per Ordinary Share.

On 22 September 2020: The Company announced the appointment of Simon Boddie as a Non-Executive Director. 

A Glimpse of Business Segments (H1 FY20)

Operational Highlights (H1 FY20)

• Excluding the post-acquisition contribution of Open LMS, the Software & Platforms division increased by 3.6% year-on-year (YoY) to £45.3 million in H1 FY20, with an increase in SaaS and on-premise software licence of 6.6%, Rustici licence and hosting of 24% and Breezy HR of 32% (on a like-for-like basis).
• However, Breezy HR has shown a fall in monthly recurring revenues from mid-March 2020 due to the lockdown restrictions, but it returned to growth in May 2020 and is now trading ahead of pre-COVID levels.
• Led by corporates delay large enterprise implementations, the PeopleFluent has seen a reduction in new sales. While retention rates have stayed largely in line with 2019 data.
• In September 2020, the Company has acquired the Patheer talent development and analytics software IP for a consideration of US$0.2 million.
• In the Software & Platforms division, LTG generated Adjusted EBIT margins of 31.5% in H1 2020, which was down from the prior year's margin of 35.6%.
• In the Content & Services division, the revenues decreased by 22% YoY, with a decline in non-recurring content revenues of 29%.
• On a YoY basis, the recurring service revenues were flat, with an 8% increase in consulting services.
• The Company witnessed a strong sales momentum from LEO, LEO-GRC and Preloaded.
• Content & Services seen adjusted EBIT margins declined marginally to 19.7% in H1 FY20 from 21.1% in H1 FY19.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 22 September 2020)

Financial Ratios (H1 FY2020)

Share Price Performance Analysis

On 10 November 2020, at the time of writing (before the market close, at 9:08 AM GMT), Learning Technologies Group Plc shares were trading at GBX 130.30, down by 0.84% against the previous day closing price. Stock 52-week High was GBX 174.40 and Low of GBX 106.20, respectively.

In the last one year, LTG’s stock price has delivered a positive return of ~21.55% return as compared to ~11.64% of FTSE AIM UK 50 index and a negative ~6.02% return of FTSE All Technology index, which shows that the stock has outperformed the benchmark index and the sector during the last one year.

From the technical standpoint, the shares were trading above the short-term support level of 20-day (around GBX 125.90) simple moving average price, which reflects a bullish signal for the stock.

In the last five years, Learning Technologies Group Plc share price has delivered approximately 484% return as compared to around 30% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last five years.

Business Outlook Scenario

The Board of LTG has reinstated its guidance for FY20 performance. It is actively pursuing its acquisition pipeline in high growth learning and talent management market. It has also been improving momentum for new sales in Content & Services in H2 FY20. The Company 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.

Moreover, it has already been progressively increasing the proportion of recurring revenue, EBIT margins, and return on capital employed over the years. 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. Furthermore, 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. In a nutshell, 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.

 (Source: Presentation, Company Website) 

Considering the robust performance in H1 FY20, sustainable EPS and dividend growth rate, excellent cash generation capabilities, strong acquisition pipeline, decent growth in digital learning and talent management markets, 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 130.30 (as on 10 November 2020, before the market close at 9:08 AM GMT), with lower-double digit upside potential based on 38.84x 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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