Company Overview: Class Limited (ASX: CL1) develops and delivers cloud-based software solutions since 2009, for the Australian wealth accounting market. The company seeks to offers a pioneering administration solution to automate physical workloads, thus, enabling accountants, administrators, and advisers to improve profitability, stimulate business growth and provide improved client service.

CL1 Details

New Product Launches, Acquisition Synergies & Growth Strategies: CL1 remains on track to innovate and invest in the expansion and development of its multi-product technology and is focused on promoting its long-term, sustainable growth for the business. The company remains on track to invest higher in R&D to accelerate innovation and expand its value proposition for customers worldwide.

• Launches New Solution: In October, the company unveiled its trust accounting product, Class Trust, enabling financial advisers, accountants, and administration professionals to systematise the trust administration process, thus making it more efficient and accurate. Class Trust is used by over 175 accounting businesses, managing greater than 2,700 trusts.
• Buyout Synergies: The company remains on track with its acquisition spree to boost its cloud business and capabilities. CL1 integrated NowInfinity and Smartcorp (Assuriti Pty Ltd) in 2020. This year, CL1 purchased ReckonDocs platform and customer base to further scale and grow its revenues.
• Customer Growth: The company has a growing number of customer relationships. CLI’s software solutions aid customers in automating key processes, reducing operating costs, and improving data accuracy. Notably, in 1HFY21, the company’s customer base rose a whopping 183% year over year to 4,456 customers, owing to NowInfinity, Smartcorp and, ReckonDocs acquisitions.

Ongoing investment in product innovation to capitalise on new market opportunities were key growth drivers. The company’s new Class Trust gained traction and currently has three times more customers compared with Class Super at comparative stages. The below picture depicts a continuous growth trajectory in Class Portfolio accounts.

Portfolio Highlight; Analysis by Kalkine Group

Key Findings from 1HFY21 Results:

• Rise in Annualized Revenues: In 1HFY21, the company’s annualised recurring revenue soared 24.6% on pcp and came in at $48.6 million. Roll forward revenues increased 29.7% year-over-year.
• Increase in Operating Revenues: Operating revenue stood at $25.83 million, representing a rise of by 27% year over year. The company continues its scale of operations, with an enhanced focus on R&D, increased investment in people and products.
• Higher EBITDA: In 1HFY21, EBITDA stood at $10.4 million, depicting an increase of 29% year over year. Notably, CL1 maintained its EBITDA margin of 40% in 1HFY21.
• Enhancing Shareholder’s Value: The company has a decent track record of rewarding shareholders through dividends. Supported by its decent net cash position, strong liquidity, improved cash flow in 1HFY21, CL1 declared a fully franked dividend of 2.5 cents. 

Balance Sheet and Liquidity Position: A healthy balance sheet will help CL1 to attain its long-term objectives, enhance its shareholder’s value and pursue further strategic acquisitions.

• Cash & Debt Position: The company exited 1HFY21 with a cash balance of $14.06 million. Total debt amounted to ~$13 million at the end of the period.
• Operating Cash Inflow: During 1HFY21, the company generated an operating cash inflow amounting to $7.64 million, as compared to an operating cash inflow of $6.68 million reported in the year-ago period.

Key Metrics: For 1HFY21, the company reported an EBITDA margin of 40.9%, higher than the year-ago figure of 40.1%. In 1HFY21, the company recorded cash cycle days of 29.7 compared to the 1HFY20 figure of 39.1 days. The debt-to-equity ratio for the period stood at 0.30x. 

Growth, Profitability and Liquidity Profile; Analysis by Kalkine Group  

Key Updates:

• Change in Shareholding: On 8 July 2021, CL1’s Perennial Value Management Limited (PVM), a substantial shareholder of the company, increased its voting power from 7.07% to 8.1%.
• Investment in Philo: On 2 July 2021, the company informed the market that it has invested $3.1 million in Philo by way of a convertible note.
• Change in Registered Office: On 21 June 2021, the company stated that its registered office and principal place of business will be changed, with effect from 1 July 2021.
• Managerial Changes: Recently, the company informed the market that CL1’s Non-Executive Director, Mr Simon Martin has stepped down from its post, due to personal health reasons. 

Top 10 Shareholders: The top 10 shareholders together form around 63.95% of the total shareholdings, while the top 4 constitutes the maximum holding. Spheria Asset Management Pty Limited held the maximum number of shares with a percentage holding of 19.21%, followed by Troncell Pty. Ltd. holding 11.82%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Loss of key Customers: The company’s financial performance might get impacted by caution in buying behaviour. Thus, retaining robust and long-term customer relationships is a tough task.
• COVID-19 Led Uncertainties: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions.
• Stiff Competition: The company is exposed to stiff rivalry from competitors developing similar product lines and services.
• Integration Risk: CL1 is acquiring many companies, which results in some integration risk.
• The company is exposed to foreign currency fluctuation risks.

Outlook: The company will continue to make higher investments for further growth in its technology and product development in 2HFY21. The company’s key area of focus for FY21 will be mainly on the continued transformation of the technology stacks, new product launches, and adhering to regulatory compliance. For FY21, the company expects technology and product investment to be ~$18.1 million. 

• The buyout of ReckonDocs is expected to contribute Circa $1.0 million in revenue in FY21 and $4.0 million in FY22.
• The company expects the EBITDA margin to be ~60% in FY22 and EPS accretive in the same year, including the impact of the acquisition.
• For FY21, the company is expecting to report a growth of 22% in revenue to $54 million, which includes ReckonDocs buyout. The Underlying EBITDA margin for FY21 is targeted to be ~40%.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~15.57% in the past six months. Currently, the stock is trading below the average of its 52-week high and low levels of $2.32 and $1.325, respectively. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium as compared to its peer average, considering its synergies from the acquisition, decent liquidity position, enhancing shareholder’s value, increase in top line in 1HFY21, and an encouraging outlook. For that purpose, we have considered peers such as Nitro Software Ltd (ASX: NTO), Envirosuite Ltd (ASX: EVS), Adacel Technologies Ltd (ASX: ADA). Considering decent liquidity position, higher revenue base, positive outlook, synergies from buyout, current trading levels, and valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $1.68, down by ~0.297% as on July 23, 2021.

CL1 Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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