Xero Limited

Negative margins but managing fundamentals for better sustainability: Xero Limited (ASX: XRO) is a software technology company headquartered in Wellington, New Zealand. It has other offices in Australia, UK, US, and Singapore. The company has more than 2,300 employees and more than 1.58 million subscribers. The company was awarded as the World’s Most Innovative Growth Company by Forbes in 2014 and 2015. It provides cloud-based accounting software catering to accountants and bookkeepers and other small business clients. The company expects to reduce cash outflow (operating less investing cash flows) in FY19 as compared to FY18. The company is, further, moving towards the cash flow break-even within its cash balance without drawing any further debt and intends to reinvest its surplus cash flow.

1H FY19 Financial Highlights (Source: Company Reports)

Over the past 4 years,the margins of the company have improved but are been reported in the negative values. During 1H19, the company reported negative Operating and Net margins. Only the EBITDA margin of 14.1% is reported in positive which is still below the industry median of 33.0%.The asset turnover ratio of 1.26x was above the industry median of 0.56x, showing that the company is able to efficiently utilize its assets to generate revenue.

The company has ~140.64 million shares outstanding with the market cap of $6.12 billion and a beta of 1.67x. During the past one year, the stock has generated a positive yield of 47.46%. But today, the stock was down by 1.149% as compared to the previous close, currently trading at the price of level $43.00. The Relative Strength Index along with the Bollinger bands indicates a bearish signal. By looking at increasing footprints in domestic and international market along with improving financials and product innovation, we maintain our ‘hold’ position on the stock at the current market price of $43.00.

The Citadel Group Limited

IncenitaPay Completed Divestment ofGruden Government Business to Citadel:The Citadel Group Limited (ASX: CGL) is a software technology company based in Australia. The company is engaged in managing information in a complex and dynamic environment via integrating systems and people. The major portion of its revenue comes from its long-term managed services and SaaS solutions. The company provides secure information to the Health, National Security, Defence and Other Enterprises. On 3 December 2018, the company acquired a government business of Gruden Pty Ltd from IncenitaPay for a total consideration of $1.65 million with of which 75% was paid on 12 December 2018 and the balance was subject to a working capital adjustment. The company anticipates great opportunities to grow business in both public as well as private markets through its unique technology coupled the acquisition of government business from IncenitaPay and other planned acquisitions.


FY18 Financial Highlights (Source: Company Reports)

Over the past 5 years,the margins of the company have improved. During FY18, the company reported Operating and Net margin of 23.9%, and 18.1% respectively as compared to the industry median of 21.8% and 11.5% respectively. Similarly, the company is generating better returns for its shareholders than its peers as its ROE of 20.5% was above the industry median of 13.3% in FY18.The asset turnover ratio of 0.78x was above the industry median of 0.35x showing that the company along with the industry is unable to efficiently utilize its assets to generate revenue.
The company has ~49.26 million shares outstanding with the market cap of ~$366.98 million and an annualized dividend yield of 1.85%. During the past one year, the stock has generated a positive yield of 16.77%. Today also, the stock was up by 2.013% as compared to the previous close, currently trading at the price of level $7.60. With better and improving margins along with higher growth potential through the acquisition ofgovernment business from IncenitaPay, we maintain our“buy” recommendation for the stock at the current market price of $7.60.
 

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