Learning Technologies Group offers enticing cash flow yield

The story for Learnings Technologies Group (LTG) hasn’t quite played out anticipated. As a corporate e-learning company, the thinking was it would be recession-resistant because its customers were required to use its product from a regulatory and compliance perspective. However, the company is blaming the macroeconomic situation for its recent slowdown.

In the 12 months to December, revenue dropped 4 per cent while its adjusted operating profit fell 1 per cent. Learning Technologies has blamed the macro conditions for a drop in projects. However, it has credited the recurring nature of its software revenue, which makes up 26 per cent of the group, for revenue not falling even further.

The problems facing Learning Technologies can be traced to a massive acquisition in 2021. This required it to take out debt and now, with interest rates rising, the cost of that debt is higher. Net interest payments have risen from £4.3mn to £15.7mn, which will drag on profits. Meanwhile, GP Strategies revenue fell 2 per cent on a constant currency basis.

The positive news is that GP Strategies' margins are improving as it gets integrated into the group. So, if its revenue problems really are just due to the macroeconomic cycle, as things improve so should its profitability.

Learning Technologies is trading on a forward price/earnings ratio of 11 times, and its strong cash flow generation means its free cash flow yield is almost 10 per cent. In other words, it is cheaply rated on that basis. Management is forecasting that revenue will be in line with the prior year, but margins are showing positive signs. The business is still faced with a challenging trading backdrop, but, given the undemanding rating, we think that the investment case remains positive. Buy.

Last IC View: Buy, 110p, 26 Apr 2023