The Citadel Group Ltd

Robust Gross Margins: The Citadel Group Ltd (ASX: CGL) had disclosed in a release that it had acquired the government business of Gruden Pty Ltd from IncentiaPay for a total sum of $1.65 million. This acquisition would strengthen the firm’s competence and capabilities in various significant government sectors.

The company achieved a revenue of $108.5 Mn for FY 2018 vis-à-vis $98.8 million in FY 2017. This rise was on account of the success on signing & progression of new contracts, and cross-selling of products. The Gross margins grew to 50% from 46.70% a year ago. This rise was driven by the rollout of scalable software solutions, quality in execution of the existing contract, management’s cost optimization initiatives.

What to Expect From CGL: Going forth, the management continues to see opportunities in the public and the private space for FY19. The company’s unique technology and scalable software solutions along with the health offerings are anticipated to drive growth going forward. The growth is expected to be organic as well as from the strategic acquisitions made.


CGL’s Key Financial Metrics (Source: Company Reports)
 
On the financial metrics front, the company registered a robust ROE performance of 20.5%, which substantially outperformed the Industry median of 11.3%. Also, the pre-tax margins came in at 23.60% as compared to the industry median of 16%. Thus, it can be deduced that it is a growth stock. Meanwhile, the stock has risen by 16.41% in the past six months as on 25 January 2019 and is trading at reasonable PE level of 22.34x. Hence, considering the strong margins achieved through organic & inorganic expansion and better than Industry ROE, we maintain our “Buy” rating on the stock at the current market price of $8.230 per share.
 

Xero Ltd

Robust growth in ARPU & continued operational efficiencies: Xero Limited (ASX: XRO) had posted its numbers for the 1H 2019 where its revenue has expanded by 37% on a YoY basis and came in at $256.50 Mn. This expansion was on account of subscriber’s growth at the global level and especially in the Australia & New Zealand region. Also, the ARPU has increased by 6% on a YoY basis and came in at $31.10 which contributed to the cause.

EBITDA saw a growth of 7.69% on a YoY basis and came in at $16.80 Mn for the 1H 2019. This growth was driven by continuing efficiencies & operating leverages achieved in the processes.

The company is enjoying cloud accounting market leadership in ANZ market with the subscriber growth of 24% and it reached 9,81,000 subscribers. Moreover, the company continued its market leadership position in the UK markets with a 40% rise in subscriber base.

What to Expect From XRO: Going forth, the company will continue to focus on growing its small business platform.The cash outflow for the financial year ending 31 March 2019, is expected to be lower than the pcp and hence the company anticipates break-even of the cash flows for the year. Post the achievement of the break-even, the company has plans to plough any surplus cash as per the drawn investment criteria.


XRO’s 1H 2019 Highlights (Source: Company reports)

Meanwhile, the stock has fallen by 5.64% in the past six months as on 25 January 2019 and is trading slightly towards the higher level. Hence, considering the robust subscriber growth and continuously growing ARPU, we maintain our “Hold” rating on the stock at the current market price of $42.300 per share.

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