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Short-term trading disappointment, long-term prospects remain bright. Buy at 21p, Target Price 38p

ILX Group, the AIM quoted provider of e-learning software and business training, has announced that, despite continuing expanding international sales and overall revenue growth, 31st March 2012 “year-end profits are likely to be below expectations due to slower than anticipated trading in the UK” . This is clearly somewhat disappointing – and the shares have responded by falling to 21p. However, the longer term outlook remains bright – and with the short-term disappointment meaning the share price now looks to even further not reflect this, our view on the stock remains positive.

In the UK ILX’s software sales are still growing year on year – affirming the company’s decision to move increasingly to digital training – but traditional classroom training is being impacted by something of a price war, with lengthening sales cycles and pricing pressure. The company has made a conscious decision not to chase unprofitable business and the UK business remains profitable, with a focus on maintaining and developing recurring revenues.

The impact of the UK trading has been somewhat offset by the continuing validation of the company’s international expansion on the back of e-learning – with year-on-year revenues in Australia up 150% to almost AU$3 million and consultancy contracts in the Middle East worth in excess of £350,000 awarded to the company within the last month.

However, in line with the guidance in the announcement, we reduce our current year forecasts to revenue of £13.5 million (from £15 million) and pre-tax profit to £0.75 million (from £1.8 million). The UK pipeline and international potential mean we reduce our numbers for next year by much less – with revenue now anticipated to come in at £16.5 million (from £17.5 million) and pre-tax profit at £1.75 million (from £2.1 million). The dividend for the current year may be reduced to reflect the lower profit outturn, but the yield remains attractive and a return to a 1.5p per share payout should be achievable next year.

This is as the net debt position has been conscientiously reduced from £3.16 million at 31 st March 2010 to £1.72 million by 30 th September 2011. This has been helped by a net £0.84 million raised from the issue of new shares, though the other £0.6 million has come from cash generated – including (excluding discontinued activities and share issue proceeds/borrowing capital repayments) £0.61 million in the year ended 31 st March 2011 and £0.17 million in the six months to 30 th September 2011, up from £0.03 million in the corresponding 2010 six months. As such we believe that within 18 months the balance sheet could well be net debt free.

ILX still sees a place for classroom training within its UK operations as it means the company is able to offer a ‘complete’ training offering, which customers seem to value. However, with good overall growth anticipated from here as the total UK pipeline (despite the noted challenges) is said to remain “encouraging” , international expansion continues and the business model is inherently scalable, the rating continues to look too low. Although the trading statement is likely to harm short-term sentiment towards the stock, given the company’s prospects from here and a balance sheet heading towards a net cash position, we believe a current multiple of 8x anticipated forward earnings is the least merited – suggesting a target price of 38p. With the shares currently at 21p, our stance is buy.

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