Company Overview: ReadyTech Holdings Limited is an Australia-based company, which is focused on developing education software. Its segments include Education segment and Employment segment. It offers a range of products for Education, such as JR Plus, VETtrak, A2E and My Profiling. Its products for Employment includes HR3, Aussiepay and ePayroll. Its products for Pathways includes JR Live, JR Active, JR Gov and Esher House. JR Live platform for job active and DES programs enabling caseworkers to match job seekers with vacancies, manage work placements, provide post-placement support (PPS) and track job outcomes. JR Active platform is integrated with Government systems and helps support career advice, administer training contracts and incentives to employers, monitor apprentices and provide business intelligence tools to inform decision making. VETtrak software offers short message service (SMS) for small to medium-sized private VET providers.
 

RDY Details

Business Progressing Well, Driven by Growing Client Base: ReadyTech Holdings Limited (ASX: RDY) is engaged in the provision of education and employment services. Under education, the company offers a student management system to vocational education and training, higher education providers, etc. Under employment, the company extends its services in the form of payroll and employee management solutions from cloud-based technology to outsourcing of human resource function. The company has a 20-year track record of organic growth and uninterrupted profitability. During the year ended 30 June 2019, the company reported revenue amounting to $33.0 million, up 13.5% on prior corresponding year revenue of $25.62 million. The revenue was 1% above the prospectus forecast. Growth in revenue was driven by new clients wins and increased sales to existing clients. EBITDA and Net profit after tax but excluding the non-cash amortisation of acquired intangibles (NPATA) for the year were also above the prospectus forecast, at $12.8 million and $5.7 million, respectively.

Going forward, the company has strong growth prospects across both its key segments, i.e., Education and Employment. The company has the capability to attract higher-value customers and expand the lifetime value of existing customers by adding value to the businesses. The company is actively seeking quality opportunities to buy, build and partner to deliver value for customers and contribute a larger return on investment for its investors.

Over the four years period covering FY16 to FY19, the company witnessed a CAGR growth of 11.3% on pro forma revenue, with FY16 and FY19 revenue amounting to $23.7 million and $33 million, respectively. Over the period, the company has reported continuous growth in subscription and licence revenue, with a CAGR of 13.9%. FY19 reported the highest increase to subscription and licence revenue at $29.7 million, up 90% on prior corresponding year revenue of $25.6 million. Coming to the earnings performance over the above stated period, pro forma EBITDA continued to rise each year, reporting a CAGR of 28.0%. As per the annual report, EBITDA margin has improved remarkably over the period, from 26% to 39%.

Performance Highlights (Source: Company Reports)
 
FY19 Results Highlights: During the year ended 30 June 2019, pro forma revenue amounted to $33.0 million, representing an increase of 13.5% on FY18. Pro forma EBITDA for the period came in at $12.8 million, up 20.8% on prior corresponding year EBITDA of $10.6 million. Average revenue per client stood at $8.9k, witnessing a rise of 12% on pcp. Statutory loss after tax stood at $1.5 million, including the impact of IPO and related costs. During the year, cash flow from operations witnessed a substantial increase of 40.4% to $12.5 million.

FY19 Performance Metrics (Source: Company Reports)

Education Segment Highlights: During the year, revenue for the education segment increased to $20.0 million, representing a growth of 12.0% on the prior year. Growth in revenue was supported by strong client wins and greater per client spend. EBITDA for the segment came in at $8.1 million, up from $7.1 million in FY18. EBITDA margin improved from 40% in FY18 to 41% in FY19. Going forward, the company, through its advanced, enterprise SaaS product, is looking to attract higher-value providers of tertiary education, including enterprise, TAFE and higher education customers. 

Employment Segment Highlights: Revenue for the employment segment was reported at $13.0 million, up 15% due to strong new client growth over the course of the year. The company also saw an improvement in spending from existing clients, on the back of employee growth and additional take up of modules, driven by targeted campaigns. EBITDA for the segment stood at $6.2 million, up from $5.1 million in FY18. EBITDA margin increased from 45% in FY18 to 48% in FY19. Under the employment segment as well, the company has built up a trusted reputation with large employers and is looking forward to further growth in the segment.

Key Achievements in FY19: During the year, the company reported substantial client growth, adding over 400 clients wins and recording new business volumes. It is now attracting new and higher value clients. During the year, the spend of new clients won 3.6 times greater than those that churned. The company reported strong progress in the higher education sector and enterprise strategy demonstrating the success of the dual brand strategy. Average revenue per client witnessed a y-o-y growth of 12% through additional modules and an increase in user subscriptions. This was supported by cross sell value-added services of My Profiling and Esher House acquisitions. Customer success during the year was depicted by maintained strong net client revenue retention of 96%. Moreover, the period was also characterised by strong customer satisfaction scores on the back of increased headcount investment in the customer success function. Another important step was spending of over $10 million in R&D for product improvements and new modules & customer value. During the year, the company also improved on its partner network across both the education and employment segments. This included the addition of Canvas and Gol for the education segment and HR and workforce management partners for employment to help drive new customer referrals to ReadyTech. In addition to the above, the company also launched its new ePayroll partner network to support customer growth through accountant and bookkeeper networks.

Treading well on the Growth Path: The business is attracting new and higher-value customers and is pursuing the largest tertiary education providers through its advanced, enterprise SaaS product. It possesses a strong pipeline of interest following the recent wins, including a contract with the University of Queensland. The employment segment has attracted large employers through its full-spectrum, service-oriented offering and trusted reputation. It is continuously investing in innovation to provide enhanced customer experience. As a part of its growth initiatives, the company is looking forward to continued investment in Saas products. It aims to invest in new talent to drive growth in ARPC and secure retention rates. To further promote customer retention, the company aims to grow the average revenue per client with license growth, upsell of modules and cross sell of value-added services. Currently, the company has a pipeline of over $15 million of potential opportunities with a number of recently added higher value deals in the tertiary education sector. Last but not the least, the company’s M&A strategy is well capitalised, with a pipeline to acquire complementary technology and customer base focused on the employment sector.

As per the performance in FY19, the management believes that the company is in a strong position to deliver on future growth opportunities. Its growth strategy is centred around higher-value customers and driving greater spend for existing customers, new client wins and value-added services.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 62.88% of the total shareholding. Pemba Capital Partners Pty Ltd is the entity, holding maximum shares in the company at 43.17%. Washbourne (Marc) and Pie Funds Management Limited are the second largest shareholders, with a percentage holding of 5.01% each.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In FY19, the company reported a gross margin and EBITDA margin of 94.0% and 22.5%, better than prior corresponding year margins of 89.5% and 19.6%, respectively. Gross margin was also higher in comparison to the industry median of 83.7%, representing better fundamentals in comparison to peers. Current ratio in FY19 also improved from 0.36x in FY18 to 0.64x in FY19. Debt-to-equity ratio for the year also reduced to 0.81x, from 2.46x in FY18, representing increased financial stability. 


 Key Metrics (Source: Thomson Reuters)  

Financial Guidance: The company expects pro forma revenue for CY19 is expected to be ~$35.1 million, representing expected yoy growth of 14% on CY18. Pro-forma EBITDA for CY19 is expected to be ~$14.6 million, with a growth rate of 28% in comparison to CY18. In the financial results’ presentation, the company reported up to the mark performance in first 8 weeks of FY20. Moreover, the new business pipeline will continue to drive revenue growth for both the business segments.


 Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies

Method 1: Price to Book Value Multiple Approach:

 
Price to Book Value based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Method 2: EV/EBITDA Multiple Approach:
 

 
EV/EBITDA Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: The stock of the company generated returns of -11.14% and 2.10% over a period of one month and three months, respectively. In FY19, the company reported decent financial performance on the back of new client wins and increased usage by existing customers, delivering a yoy growth of 12% in average revenue per client. Going forward, the company seems well-positioned to deliver on its growth strategy focused on investment in SaaS products, increased ARPC, increasing new and high-value customers, etc. Considering the performance in FY19, a growing client base, strategy to drive further growth and current trading levels, we have valued the stock using two relative valuation methods, Price to book value multiple and EV/EBITDA multiple and arrived at a target price of double-digit growth (in % term). Hence, we recommend a “Buy” rating on the stock at the current market price of $1.670, up 2.141% on 06 December 2019. 

 
RDY Daily Technical Chart (Source: Thomson Reuters)

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