Company Overview: Xref Limited, formerly King Solomon Mines Limited, is engaged in software development for the human resource (HR) industry. The Company is engaged in online candidate referencing. The Company is engaged in leveraging its database to provide predictive analytics, which enable human resource directors to make data-driven decisions. It is also developing products tailored for the United Kingdom market and managing trials for clients in Canada. It automates the practice of obtaining and verifying references that job candidates provide. It transforms phone-based, manual procedure into a cloud-based, electronic process. It allows the users to request references via the Company. The Company requests referee information from candidate. It gathers background information from referees. It analyses candidate and provides report. It offers data governance, fraud prevention, comparable metrics and customized reports.
 

XF1 Details

Record Sales Performance in Q4FY19: XREF Limited (ASX: XF1) is primarily engaged in the development of human resource technology that automates the candidate reference process for employers. The company’s addressable market includes 120 million employees in Europe, 15 million employees in Australia and New Zealand, and more than 180 million employees in North America. With respect to its business model, the company’s clients purchase XREF credits to use its candidate referencing platform. The credit sales earned are initially reported as unearned income on the financials and are recognised as cash receipts after the payment of the credits by clients. During the year ended 30 June 2018, the company reported total sales amounting to $7.1 million, up 72% on the prior year. Recognised revenue for the period stood at $4.8 million, up 63% on the previous year. During FY18, 87% of the sales went to Australia and the remaining 13% accounted for sales in the overseas market.

For the period FY15 - FY18, the company has seen an upward trend in both credit sales and revenue. Credit sales for FY15 were reported at $0.67 million, which increased to $7.1 million in FY18. Looking at the performance in terms of revenue over the period FY15 to FY18, the company witnessed a top-line CAGR growth of 135.8% with FY15 revenue amounting to $0.37 million and FY18 revenue amounting to $4.85 million.


Trends in Sales Revenue and Recognised Revenue (Source: Company Reports)

Clients Acquisition: During FY18, the company continued to increase its client base. By the end of the year, the company had 750 direct paying clients using its services globally. Moreover, through the usage of integrations to access the company’s platform, XREF had 136 clients using its services through channel partners by the end of the year. New clients acquired during the year contributed an annual revenue per account (APRA) of $8.4k. Overall APRA during the year increased to $10k. The company derived 45% of the sales revenue for the year from new clients acquired in FY18.


Client Acquisition (Source: Company Reports)

Global Growth: During FY18, the company progressed well on its global growth and opened a new Norwegian office in the month of September 2017. The office caters to the requirements of customers in Denmark, Norway, Sweden, Iceland and Finland.

Q4FY19 Highlights: During the quarter ended 30 June 2019, the company reported record sales amounting to $3.6 million, up 38% on the prior corresponding period. Credit usage during the period stood at $2 million, up 40% on the prior corresponding period. 28% of the credits during the period were utilised by the clients integrated through the company’s channel partners. The period also saw strong growth on the international front with sales from the overseas offices accounting for 20% of total sales in the quarter, as compared to a percentage of 10% in the prior corresponding period.


Credit Usage and Sales (Source: Company Reports)

Cash Collections: During the quarter, the company collected a total of $2.704 million of cash from customers, representing a significant increase on the previous record set in Q1FY18. During the quarter, the company had reported cash collections amounting to $2.660 million. Moreover, the company expects record sales in the quarter to covert into strong collections in the first quarter of FY20.

New Client Wins: During Q4FY19, the company added new clients for its platform. The new clients are spread across multiple geographies including Ministry of Foreign Affairs and Trade, New Zealand, Tipico Services, Malta, The Ritz London, UK, Southampton Football Club, UK, Mantena AS, Norway, Uncommon Schools New York, US, and Melbourne Cricket Club, Australia.

Cash Outflows: Net cash outflow during Q4FY19 was reported at $1.519 million, as compared to $1.938 million in the previous quarter. Gross cash outflows for the quarter stood at $4.136 million, increasing marginally on the estimate of $4.090 million. Average net monthly operating cash outflow across 12 months period dropped from $0.536 million per month in 2018 to $0.404 million per month in 2019. At the end of the period, the company reported no debt in the financials and had cash in hand amounting to $8.04 million.

Acquisition of RapidID: During the quarter, the company has agreed upon to acquire RapidID, a disruptive ID verification and fraud prevention platform. The acquisition is likely to provide XREF with an access to RapidID’s client base, which in turn will provide a boost in revenues. RapidID has acquired some significant clients including Easypay, Judobank, Sunsuper, Experian, Uber, Creditor Watch and Health Engine. The company is also planning further development in non-HR markets that will offer XREF with great opportunities to operate in new sectors. While continuing to evolve under its current branding and website, RapidID will be identified as an XREF company. The acquisition is a strategic fit for XREF and has been integrated into the company’s core platform, with additional paid identity checks available to XREF’s clients and channel partners. The company now has access to a seamless and integrated service for HR professionals to verify the backgrounds and identity of candidates.

As a consideration, XREF will purchase all the shares in Rapid ID Pty Ltd through a combination of cash and XREF shares. Total value of the consideration stands at A$1.5 million. Cash composition of the consideration will amount to A$600,000 and share based consideration will be valued at $900,000 AUD.

Shareholder Update: In the month of May, the company released an announcement notifying that Industry Super Holdings Pty Ltd ceased to be a substantial shareholder in the company since 22 May 2019. As per another update, it was noted that FIL Limited’s voting power in the company increased from 6.72% to 8.14%.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 60.90% of the total shareholding. Griffiths (Timothy David) and Seymour (Lee-Martin John) hold the maximum interest in the company at 18.64% each, followed by AustralianSuper at 6.04%.
 

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: In 1HFY19, the company improved significantly on its margin performance as compared to the prior corresponding period. The company is moving rapidly towards improved EBITDA margin and Operating margin, and seems well-positioned for further improvement in the near future.


 Key Metrics (Source: Thomson Reuters)

Key Risks: The company’s business is exposed to three main risks, including credit risk, liquidity risk, and market risk. (a) Credit Risk arises on default by a third party on its obligation to the Group, that may lead to a business loss. In order to manage the risk, the company continuously monitors defaults of customers and other counterparties. (b)Liquidity Riskrepresents the ability to meet obligations whenever they are due. XREF manages this risk by managing its cash flows and ensuring adequate cash in place to cover any potential short falls. (c)Market Risk involves the threat posed by changes in market prices, such as foreign exchange rates, equity prices and interest rates that affect the company’s income or the value of its holdings of financial instruments. The company mitigates this through market risk management and controls market risk exposures within acceptable parameters while optimising the return.

Cash Outflows for FY20: The company expects gross cash outflows for Q1FY20 to be $4.98 million. The company generally sees increased outflows in the first quarter of each financial year as compared to the fourth quarter of the previous year. Therefore, the company expects gross cash outflows in Q2FY20 to return to typical quarterly level with only three pay runs during the period.

Outlook: The company is focused on driving international expansion, as demonstrated by key growth metrics. To reiterate, the company’s international sales component in total sales increased from 10% in Q4FY18 to 20% in Q4FY19. The company aims to focus continuously on growth through its strengthened team and a growing pipeline of high-value opportunities.


Key Valuation Metrics (Source: Thomson Reuters)

Stock Recommendation: The stock of the company generated returns of 2.13% over a period of 6 months and has a market capitalisation of ~$79.48 million. The company has seen a decent performance in Q4FY19, reporting record sales of $3.6 million. Moreover, sales during the quarter are expected to convert into strong cash collections in Q1FY20. The company also reported strong growth on the international front with overseas offices contributing a good amount of total sales. The period was characterised by an increase in the client base from multiple locations. The acquisition of RapidID will also add to the company’s existing client base and will help to generate additional revenue in the future. Overall, 4Q was proved the biggest quarter in terms of sales and credit usage. The company continued on its growth trajectory in Q4FY19 and also reported record activity levels in July 2019. Currently, the stock is trading at close to its 52-week low levels of $0.420, proffering a decent opportunity for accumulation. Hence, considering the performance in Q4FY19, accelerating global expansion as depicted by in-process acquisition of RapidID and new client wins and a strong start to FY20, we give a “Speculative Buy” recommendation to the stock at a current market price of $0.490, up 2.083% on 02 August 2019.


XF1 Daily Technical Chart (Source: Thomson Reuters)

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