Company Overview: Xero Limited (ASX: XRO) provides software solutions across various geographies, offering cloud-based accounting software that connects small businesses to their advisors. It offers an ecosystem of more than 1,000 third-party apps and over 300 connections to banks and other financial partners. The company was listed on ASX on 8 November 2012.

XRO Details

Higher Revenue Base and Robust Subscribers Aids XRO: The company witnessed strong subscriber growth and ARPU momentum across the portfolio during the full year ended 31 March 2022 (FY22). XRO continues to invest in building products, growing partnerships, and expanding internationally, thus striving for long-term growth and meeting customer needs.

Geographical Diversification:

• Australia: Revenues from Australia went up a whopping 26% year over year to NZ$483.3 million in FY22, with an addition of 229,000 net subscribers during the period. XRO continues to invest in additional products and services such as payroll, payments, and add-ons, given the higher demand in Australia.

• New Zealand: Revenues from New Zealand showed a growth of 15% in FY22, with an addition of 66,000 net subscribers during the period. In New Zealand, XRO witnessed robust cloud adoption and delivered double-digit subscriber growth.

• UK: Revenues from this region stood at NZ$291.6 million in FY22, up 30% year over year. XRO invests in readiness for upcoming phases of Making Tax Digital (MTD), which are expected to impact millions of UK small businesses positively. It added 130,000 net new subscribers during the period.

• North America: Revenue from North America improved by 28% to NZ$72.6 million in FY22, with an addition of 54,000 net subscribers during the period. XRO focuses on developing the partner channel in North America. XRO unveiled a wide range of new report features and developments for US customers.

• Rest of World (ROW): Revenue from ROW skyrocketed 85% year over year, and subscribers increased to 226,000 during the year. South Africa and Singapore continue to be strong performers with a large base of subscribers.

Financial Snapshot of FY22; Analysis by Kalkine Group

Decent Liquidity Position & Key Metrics: The company’s net cash amounted to around NZ$51.2 million at the end of FY22. Total available liquid resources came in at NZ$1.1 billion as of 31 March 2022, which included NZ$150 million of undrawn committed debt facilities. For FY22, the company reported a current ratio of 5.45x, higher than the industry median figure of 2.43x.

Gross Margin Trend; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 35.04% of the total shareholdings, while the top 4 constitute the maximum holding. Drury (Rodney Kenneth) held the maximum number of shares with a percentage holding of 6.63%, followed by Pinnacle Investment Management, Ltd. with 6.04%.

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: Net loss in FY22 stood at NZ$9.1 million, against a profit of NZ$19.7 million reported in the year-ago period. Hence, these mounting losses may throw tough challenges at the company’s overall functioning and may dampen margins in the future. Any adverse movement in foreign exchange price, general global economic and stiff competition may impact the company's financial performance.

Outlook: The company continues to focus on increasing its global small business platform, and investing higher in product and technology investment, thus adapting to the changing operating environment, and driving long-term shareholder value. As a percentage of operating revenue, total operating expenses (including acquisition integration costs) are expected to be at the lower end of 80-85% for FY23. The acquisition of TaxCycle will aid XRO with direct access to an established Canadian income tax solution and customer base, thus extending its product offering in that market. With robust demand for cloud-based accounting software, retention of existing and addition of new customers, the company remains well placed to grow its foothold in the international markets.

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 ~38.78% in the past six-months. Currently, the stock is trading below the average of its 52-week high and low levels of $156.65 and $75.8, respectively. The stock has been valued using an EV/Sales-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount compared to its peers, considering the losses in FY22, decrease in free cash flows, integration risk, etc. For the purpose of valuation, peers such as WiseTech Global Ltd (ASX: WTC), REA Group Ltd (ASX: REA), NEXTDC Ltd (ASX: NXT) have been considered. Considering the recent product launches, completion of acquisitions, positive long-term outlook, higher revenue base, robust customer base, current trading levels, and an indicative upside in valuation, we recommend a ‘Buy’ rating on the stock at the closing market price of $85.63, up by ~1.0% as on 3 June 2022.

XRO 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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