Tribal, a public-sector outsourcer, has certainly had a colourful past. Back in the glory days of 2003, the stock traded at 380p, sustained by massive investments in front-line services such as the NHS and education. How things have changed. After a series of profit warnings, board changes and disposals – the latest being to offload its health arm to Capita in April for £15.8m – Tribal has reinvented itself as a pure-play education provider split into two complementary divisions.
The first is technology (39% of sales). The firm develops computer programs to aid learning for around one million e-portal users and manage student activities for British and overseas universities. The software relating to the latter has already been installed in 70% of all UK higher education colleges.
The services arm (61%), on the other hand, provides teacher training courses, as well as running the National Centre for Excellence in the Teaching of Mathematics, which helps around 40,000 teachers improve their skills. It also boasts long-term agreements with Ofsted, the industry watchdog, to inspect around 40% of the country’s schools.
Tribal Group (LSE: TRB)
Tribal is a profitable and cash-generative business with strong positions in niche segments. Excluding the restructuring costs, Tribal reported a 7% rise in first-half EBITA to £2.9m on revenues up 10% to £57.5m compared with last year. Its cost reduction programme is bearing fruit, with targeted savings of £5.1m per year by 2012. Chairman John Ormerod has said that: “We have achieved savings of £0.5m during the first half, and a further £2.4m is expected in the second. As a result, we are trading in line with expectations.” According to house broker Investec, Tribal should achieve 2011 turnover and underlying earnings per share of £111m and 7.6p respectively, rising to £117m and 8.5p in 2012. So the stock trades on a frugal p/e of less than seven while also paying a 2% dividend yield. I value Tribal on a nine times EBITA multiple. After knocking off £17.3m in net debt, that delivers an intrinsic worth of 70p a share.
Tribal is a niche provider, and could get squeezed by its larger rivals or government policy U-turns. But that’s already baked into the valuation. A £180m order book provides excellent revenue cover and the group looks like a prime acquisition target. Investec has a price target of 60p a share.
Rating: SPECULATIVE BUY at 50p (market cap £46m)