Very dependent on a small number of government contracts; the sudden, unexpected loss of one the previous month, coupled with the likelihood that many departments will be forced to curb expenditure, puts the group's earnings at risk as the economy turns down.
Tribal Group provides support services primarily into the UK public sector (health, education, local/central govt). The share price has fallen by >50% in the last 18 months on contract delays & the gradual erosion of what were very high margins (20%+). In Dec 04 they finally announced a major, long-awaited £214m 5 year contract with the NHS and have a number of cost cutting initiatives to address the business lines under most pressure. Despite this we assume that margins will continue to erode gradually across most of its activities from hereon in due to increased competition.
However, the company is in a sweet-spot as the government is clearly aiming to get the national and local health/education services to use the private sector (from around 7-8% now to 15% in the medium term). Tribal Group should be in a position to benefit from this trend. Given the company has shown it can win major contracts in what is a growing market and is addressing some of the under-performing business lines then we believe that the current share weakness represents a good entry point. The share is trading at 0.6x its book value whilst generating a RoE of 8.5%. The FCF yield is > 10% once a major NHS contract funding has been completed and the forward PE is a modest 7.3x. Even assuming some further margin decline, this is a value play in an attractive sector.
| Sedol |
Type |
Price |
Date |
| 3018152 |
Sell |
£ 1.063 |
14/01/2008 |
| 3018152 |
Buy |
£ 1.973 |
13/12/2005 |
| 3018152 |
Buy |
£ 1.77 |
21/06/2005 |
| 3018152 |
Buy |
£ 1.33 |
10/03/2005 |
| 
