Company Overview: ReadyTech Holdings Limited (ASX: RDY) is a software-as-a-service (SaaS) provider, having its operations divided into two main divisions – Education and Employment. In the Education segment, the company provides a student management system to vocational education and training, international and english language and higher education providers. In the Employment segment, the company provides payroll and employee management solutions from cloud-based technology to the outsourcing of human resource function. The company was listed on ASX on 17^th April 2019.

RDY Details

Targeting High-Value Customers to Boost Revenues: ReadyTech Holdings Limited (ASX: RDY) is a software-as-a-service (SaaS) provider, having its operations divided into two main divisions – Education and Employment. During the year ended 30^th June 2019, the company exceeded all the targets outlined in the prospectus, with pro-forma revenue for the year witnessing a rise of 13.5%, ahead of the prospectus forecast by 1%. Pro-forma EBITDA and NPAT were also above the forecast. The company’s growth strategy is centered around the acquisition of new, high-value customers and increased existing customer spending with the help of new product additions and value-added services. While the company seems well-positioned to deliver organic growth across both its segments, it is always in a constant search to grow in its core markets through acquisitions and partnerships.

Over the period covering FY16-FY19, pro forma revenue of the company witnessed a CAGR of 11.7%. Revenue growth was backed by continued subscription and licence revenue growth, which increased by 90% in FY19. Pro forma EBITDA over the same time frame witnessed a CAGR of 28%, with FY19 and FY16 EBITDA amounting to $12.8 million and $6.1 million, respectively.

Revenue and EBITDA Growth (Source: Company Reports)

During 1HFY20, the company delivered double-digit growth in pro-forma revenue, reflecting the continued delivery of its strategy to acquire high-value customers across both segments. The strategy gained momentum during the half, with the company’s student management system securing a major enterprise contract. The period was also characterized by investments in product improvements and new modules, which further enhanced customer value and boosted client revenue retention and satisfaction scores.

Going forward, the company aims to deliver organic growth on the back of the increasing customer interest in higher-value markets for its student management systems and a strong reputation in payroll and HR admin systems. An optimistic outlook for both the Education and Employment segments will enable the attraction of larger business customers, which, in turn, will inject more revenues into the business.

1HFY20 Results: During the half-year ended 31^st December 2019, the company reported decent revenue and earnings growth and accomplished the CY19 forecasts set out in the initial public offering prospectus. Pro forma revenue for the half year stood at $19.2 million, representing an increase of 19.9% on the prior corresponding period. Underlying EBITDA for the half stood at $8.3 million, witnessing a yoy increase of 35.9%. Underlying net profit excluding acquisition amortization came in at $4.3 million, up by 73.8% on pcp. Growth across key metrics was supported by continuous execution of the company’s growth strategy and acquisition of new clients, while increasing business across the existing client base. On an organic basis, revenue for 1HFY20 increased by 13.2% to $18.2 million.

1HFY20 Key Metrics (Source: Company Reports)

Education Segment Highlights: Revenue for the Education segment came in at $10.7 million, representing an increase of 11% on prior corresponding period. EBITDA for the segment stood at $4.8 million, up 30% on the prior corresponding period. During the half, the company made strong headway in higher education, TAFE, international education and workforce development markets. The company was granted an enterprise contract with Bendigo TAFE and Kangan Institute in Victoria, valued at $7 million. Under the contract, the company has granted an initial software subscription of 5 years and is expected to recognize revenue Q4FY20 onwards. Apart from the newly signed contract, the company derived benefits out of cross-sell opportunities across its existing customer base. Over the half-year period, the company continued to invest in R&D. The company invests over $10 million per annum in product improvements and new modules to enhance customer value. During the first half, such investments were directed towards digital credentials, enhancements to student services, online enrolment, new workflow automation, apps, self-service and onboarding upgrades.

Employment Segment Highlights: Revenue for the Employment segment stood at $8.5 million, after incorporating revenues from the acquisition. Y-o-Y increase in revenue came in at 35%, representing the contribution from complementary strategic acquisitions of workforce management and payroll software and services businesses, Zambion and Wagelink. EBITDA for the segment stood at $4.1 million, as compared to $3.2 million in the prior corresponding half. The strategic acquisition across the segment provided the company with new customer opportunities in the New Zealand and South Australian markets.

Going forward, the company will continue to generate organic revenue growth, along with an additional contribution from acquisitions. The success of the company’s growth strategy is evident in the newly signed contracts and growth across key metrics, with the momentum expected to continue in the years ahead.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Increased Profitability: In 1HFY20, the company had a gross margin of 94%, higher than the prior corresponding period gross margin of 91.5%. The margin has seen continuous improvement since 1HFY18, driven by increased traction for the company’s products. EBITDA margin for the half came in at 41.2%, which increased substantially in comparison to the EBITDA margin in 1HFY19 and 2HFY19 of 22.1% and 22.9%, respectively. Net margin witnessed a substantial improvement on the previous two corresponding halves and stood at 10.6% in 1HFY20, with new customer wins and increased existing customer revenue supporting business profitability. Current ratio and debt/equity ratio for the half stood at 0.51x and 0.95x, respectively.

Key Margins (Source: Refinitiv, Thomson Reuters)

Outlook & Guidance: The company’s cloud-based student management systems have gained traction through new innovations. In 1HFY20, the company launched the digital credentials for vocational education, which will add value to the services provided to new and existing clients. In the Employment segment, the company is providing a leading cross-platform choice of payroll and workforce management technology for small, medium and large businesses, with the integration of Zambion and Wagelink. While the new contract in the Education segment is expected to generate revenue from Q4FY20, the company expects Employment segment sales to grow with the introduction of a new offering in the form of HR3+ in Australia. Moreover, the company is continuously investing to boost client revenue retention and customer satisfaction scores. For FY20, the company expects to deliver total revenue growth of ~20%, with an organic growth rate in early double digits. Underlying EBITDA margin for the year is expected to be ~40%.

Key Risks: The company undertakes certain transactions denominated in foreign currency, exposing the business to foreign currency risk through foreign exchange rate fluctuations. The company is also exposed to interest rate risk, arising from its long-term borrowings at variable rates. An event of default on contractual obligations by a counterparty exposes the company to credit risk and may result in a financial loss. Moreover, general economic conditions in Australia, competition in the markets where RDY operates or may operate in and regulatory concerns, may hamper the financial performance.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As per ASX, the stock is inclined towards its 52-week low of $0.96, proffering a decent opportunity for the investors for accumulation. A high client revenue retention of 95% speaks volumes about the quality of RDY’s offerings. The company is continuously engaged in new product innovations to drive performance and maintain healthy relationships with existing customers, while looking out for new high-value customers. We have valued the stock using the Price to Earnings multiple based illustrative relative valuation method and have arrived at a target price with an upside of low double-digit (in percentage terms). Considering the attractive trading levels, decent financial and operational performance, good progress on growth strategy, and plans in pipeline, we recommend a ‘Buy’ rating on the stock at the current market price of $1.365, up by 0.368% on 10^th July 2020.

RDY Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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