Tribal $TRB, Recovery Play, Cheap Business with a defendable moat

Entered Tribal a couple of days ago at 27p ($TRB) – following 50% fall.

Tribal produce student record software.  I innately like the business – the software is complex and highly linked to other processes/ procedures, certainly in HE, also in the other markets Tribal serves.  This makes switching difficult and costly, acting as a pretty effective moat.

There are also substantial economies of scale.  Entrants into this market need to develop a complete software package, then sell it  – again making entry difficult and not worthwhile.  There are also network effects – staff are familiar with tribal’s packages, they may not be familiar with others.  Any institutions wanting to switch away from the ‘industry standard’ may need to pay more / offer better conditions to get the skills they need or retrain staff / adjust processes….  There is a greater supply of staff with skills in the standard software.

These barriers are not insurmountable and are likely stronger in HE than FE or the other sectors, nevertheless they are significant.  With greater numbers of occurrences of fraud in education scrutiny on providers will be higher and this is likely to feed more demand for data in the medium term.

To summarise Tribal’s products:

  • SITS:Vision “world’s leading student- and course-management solutions for further (Scotland) and higher education” (TRB Website)
  • ebs4  “market leading, student information management solution”   “ebs4 the solution of choice for over 120 colleges in England and Wales”
  • Maytas “Maytas is the UK’s number one learning management information solution and is designed to meet the back office management needs of learning providers and employers.”
  • Synergy “The Synergy Suite is an established and mature suite of software being used in over 100 authorities in the UK”

Over time the barriers to entry are likely to become higher.  There is more data collected and used, more linking of data between different areas and it is used more widely across institutions – all making any competitor system harder to develop – not impossible but certainly more difficult…

Contrary to this its possible that institutions could band together to replace Tribal’s systems – as they all have similar needs… As a result, excess profits are limited to some degree.  Then again lots of public sector institutions couldn’t run a piss up in a brewery and have been badly burnt on IT projects in the past.  So they will thing twice or even three times before trying anything similar… (For the Tories reading this it isnt due to cushy conditions.  Instead, badly structured pay scales and exploitative practices cause the best “doers” to leave, whilst overpaid paper pushing managers remain, managing people who can’t do the job.)

Tribal have issued a series of profit warnings, lost their CEO and today issued a rights issue.  Since the start of 2015 the shares have lost circa 81% of their value.    In short, business has not been good.

The rights issue will raise £30m.  I recon the company owes (net of receivables) £51m.  The company has a current market capitalisation of £26m.

If I assume the market cap doesn’t change post rights and all proceeds go to pay off debt – this gives total money owed of £21m.  As yet they haven’t announced the extent of the discount which will be applied to the rights.

Few acquisitions got tribal in a mess –

  • 2015 Callista £1.7m
  • 2014 Sky Software £1.91m – £8m
  • 2013 I-graduate – £7.5m

So depending on how much value you think Tribal have destroyed during their management there is a few good million potentially here if these can be sold off… Could be up to the market cap if you are an optimist.  I am not an optimist, particularly on I-graduate I think they were taken – potentially paying “up to” £7.5m for a business earning £432k in 2012!

So lets say this can all be sold for £5-£10m.

Looking through existing P&L most of the EBIT (60% or £11.1m) in 2014 comes from software development and customer services.  Next biggest is inspection – I think mostly Ofstead, a contract which is going away, worth £4m.  Implementation is worth 2.8m.

If I then look at H1 results revenue in software development is about the same as in 2014 but profit has fallen massively.  They say it is due to renegotiation of the New South Wales Student contract.

In general the company is spending too much on sales and administration / growth.  In 2014 76% of revenue came from the established UK base, 19% from Australia.  I suggest the rest isnt worth chasing – couple of million here, couple there sub-scale businesses.  In short people who should understand their business and the strong barriers to entry which exist are trying to enter other markets.  I think the penny is dropping – the rights issue statement says:

Going forward, Tribal will focus on supporting and developing its existing customer base, improving the quality and efficiency of our account management as well as continuing to win new customers”

I expect costs can be cut and margins improved reasonably easily. They state in their October 2015 statement:

Despite implementing initiatives to drive sales and increase our operating efficiency, we have been impacted by the more difficult trading environment. We are strengthening our sales leadership, fundamentally reviewing of our sales priorities and processes, and better aligning our cost base with our ongoing activities.”

They propose delisting from the official list and going to AIM – I intend to vote against this – I like the protection not being on AIM gives me having said this it is not a gamechanger for me.

Looking at free cashflow EBITDA of probably 9-10m in 2015 (double half year, less a bit), capex 5-6m, again double half year.

This gives 3-4m free cash flow.  Market value of equity is 55m (including money I will have to put in as part of the rights issue).

Unfortunately this includes about £4m of EBITDA from OFSTEAD inspection contracts which are going away.

Clearly we are above cash flow break even in 2015, after that there is much less visibility.

Looking through annual reports over the last few years we get about 11m of EBIT from the core software with £5-7m from everything else.

Group costs have been 4-5m in EBIT terms.  The software is likely to tend toward stability – it’s the structure of the industry, as a result we are likely to get 11m of EBIT each year, say £9m.  Post rights company has a EV of 46m – and this is not including any value from the consultancy side of the business.

H1 2015 results didnt support the stability thesis in EBIT terms but the revenues were more or less stable (underlying down 10%).  In the H1 statement there was comment regarding movement of revenues to H2.  In the recent profit warning results were pushed to H2 2016.

Very much a turnaround situation – though I have done well from similar in the past they are often uncomfortable to hold – price may well fall before it rises.  Fundamentally this is a good business to be in, at a cheap price, it does however appear to be appallingly badly run.  In 2014 they paid CEO and finance director £2.7m – we will be lucky to get that this year in EBIT!

Currently sized at about 4% of my holding – but as I will subscribe to rights this takes it up to 8% and I will add on weakness – probably if the offer goes below 20p.

There isn’t much visibility on the earnings on this – hence the large fall.  I also have suspicions that the move to AIM may be  to make it easier to sell the company / buy it out in some way.

I should point out I work in University administration (3 days a week) alongside my investing – so I use Tribal’s SITS product often.  My views are entirely my own and unrelated to my job / role employer.



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