What can we learn from corporate training groups’ share prices?

Forget those toe-curling workplace training videos where actors hammed up hazards on the stairs. Staff training has evolved alongside the digital economy.

The pandemic, online schooling and working from home have only accelerated the shift towards virtual classrooms and online courses designed to engage employees and help them cope with changing working patterns.

Whether it is called upskilling, reskilling, career development, life-long learning or, more clinically, the “optimisation of human capital”, employees and employers want more of it. And they want it delivered flexibly, online, and without overly disrupting the working day.

It means corporate training is becoming bigger business than ever. Think Euan Blair, progeny of Tony, former UK prime minister, whose venture Multiverse was valued at $1.7bn last month. Multiverse assesses, coaches and places apprentices and runs in-work training packages for employees of all ages moving into digital, tech and data jobs.

“We are always on some course or other,” a top international banker told me wearily. But the costs can be high if “we don’t keep at it. Look at the $100mn fine for EY last month”.

In June, EY, the accountant, agreed a $100mn settlement with the US securities regulator following claims that staff had cheated in exams. EY agreed, among other things, to impose training to “strengthen” commitments to “compliance, ethics and integrity”.

No one quite knows the size of the corporate training market but “one thing is for sure — it’s very large,” says the bank BMO. It reckons the market in the US alone is worth about $90bn and rising.

Amazon, for example, recently outlined plans to invest more than $1.2bn to upskill 300,000 of its employee worldwide by 2025.

Yet for all that, there are surprisingly few quoted companies focused on providing digital workplace education. The market is highly fragmented and dominated by privately owned companies.

Admittedly, a flurry of edtech groups floated in the US last year, including online platform providers Udemy and Coursera. But they have since had mixed results and shares have fallen hard during the tech sell-off. Lossmaking Coursera’s market value is down from $6bn at float to close to $2bn.

In the UK, investment opportunities are even more limited. But there is one particularly interesting business — Learning Technologies Group, part software, part content provider, which floated on the Alternative Investment Market in 2013. Its founders, chair Andrew Brode and chief executive Jonathan Satchell, spotted a rising demand for more regulation and compliance after the financial crash.

I had a chance to catch up with Satchell, nearly a decade after our first conversation.

The plan then was to create a high-margin, cash-generative buy-and-build vehicle with lots of recurring revenues focused on digital workplace learning. “We are 10 times bigger now,” Satchell says, happily. Since 2013 LTG has tapped investors six times and bought more than 15 companies and the group now offers anything from learning management systems and leadership courses to staff evaluation tools. It operates in 34 countries and employs about 40,000 people and pretty much covers the corporate learning waterfront, according to BMO, which ranks it among the world’s top 20 training companies across most segments of the market.

Its revenues have increased steadily from about £8mn in 2014 to nearing £147mn in 2021. Earnings before interest — operating profits — have risen from £1.5mn to £54mn. 

However, the group is still a stock market minnow. It seems that the market struggles to value LTG and its shares are down a third in a year. “Nothing looks quite like LTG,” says one stockbroker. “Certainly not in the UK”. 

It is not quite edtech and not quite a service company and its shares are not quite worth £1bn, trading at about 14 times forecast earnings. Its enterprise value (equity and debt) is about 10 times earnings before interest, tax, depreciation and amortisation.

LTG’s nearest UK comparator is perhaps the similarly-sized Kainos, partner of US-listed Workday, the workforce management and software group. Kainos helps government departments and companies manage their human resources systems. Even after a 23 per cent fall in its shares over the past year, the HR group is trading at more than 20 times next year’s forecast earnings.

Goldman Sachs analysts lump LTG into a subset of the media sector where it sits alongside Pearson, the education group valued at about £6bn, and Kahoot, the Oslo edtech e-learning quizmaster, whose backers include SoftBank.

The acquisitive Kahoot is barely profitable and its EV is nearer 40 times forecast Ebitda even after a sharp slide in the shares over 12 months. So it still looks pricey.

Pearson has shrunk its focus to higher education, e-textbooks, qualifications and what its newish management team calls “life-long learning”. Despite a record of disappointing revenue and earnings, and its operating margins being about half LTG’s, Pearson shares trade at about 17 times earnings expected this year. Early this year Goldmans dubbed Pearson an “idiosyncratic turnround” story. Not exactly a ringing endorsement of the one-time owner of the FT.

Not that LTG is risk-free. Satchell himself admits “we are at an interesting time” and the market worries “we are at a make or break moment”.

Last year, LTG made its biggest and most ambitious acquisition picking off US-listed GP Strategies for nearly $400mn, partly through debt, partly through equity. GPS more than doubles LTG’s revenues to close to £600mn and brings in big-name customers such as Microsoft and General Motors, but GPS’s operating margins were a quarter of LTG’s 20-plus per cent. And the deal skews LTG revenues back to content, consultancy and services. Post acquisition, under a third of LTG’s income will come from its higher-margin software side.

Satchell seems confident he can more than double GPS’s profitability by the end of the year and pay off debt fast. Broker Numis says the integration is going well. Unfortunately in April the group stumbled over revenue recognition and made a circa £6mn balance sheet restatement. As one broker says “the issue was immaterial but the timing was unhelpful”. It fuelled uncertainty. It’s not just that recession will impact corporate training budgets or that GPS is a big mouthful for a titch like LTG, but there will be no more deals for a while.

There is always a moment when investors in roll-up vehicles begin to fret that earnings growth falters once acquisitions stop. Tellingly, Goldman Sachs, brokers, this month edged its organic earnings growth expectations down a fraction to 4 per cent.

That said, as the bank points out, LTG’s rating is at historic lows and at a huge discount to peers. That seems overdone. The demand for corporate training will remain strong. And just because a school is small, it doesn’t mean it can’t deliver a good education.