Stocks’ Details
 

Elmo Software Limited

Investment in Hero Brands: Elmo Software Limited (ASX: ELO) is one of the leading providers of software-as-a-service (SaaS), cloud-based human resources and payroll solutions. As on 9 January 2020, the market capitalization of the company stood at ~$469.82 million. The company has recently announced an investment in Hero Brands Pty Limited of $1.18 million in exchange for 50% equity ownership with an additional contingent payment of $0.5 million. This will provide the company with increased Research and Development capability. 

In the recently held AGM, the top Management stated that the company has delivered record financial results in FY19 with an increase of 47.8% in annualised recurring revenue (ARR) to $46.0 million and an increase of 51.2% in revenue to $40.1 million. 


FY19 Financial Summary (Source: Company Reports)

Growth Opportunities: The company is expanding its market opportunity and is building a convergent platform that is broad in functionality and simple in usability. This will support the continuous growth and will promote autonomy within teams and alignment across teams. The company has given its FY20 guidance for ARR and expects it to be in the range of $61 million to $63 million. It also expects increased traction in the new market segment and anticipates the revenue for the next year to come between $53 million to $55 million. 

Valuation Methodology: Price/Book based Approach

Price/Book based Approach (Source: Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock gave a return of 16.98% in the past one year. In the span of 4 years from FY15 to FY19, the company witnessed a CAGR of 41.17% in gross profit. During FY19, gross margin of the company stood at 86.5%, higher than the industry median of 83.7%. This indicates that the company is managing its costs well and is capable to convert its revenue into net profits. Considering the returns, CAGR in gross profit and decent outlook, we have valued the company using Price/Book valuation approach and have arrived at a target upside of higher single-digit (in % terms). For the said purposes, we have considered Xero Ltd (ASX: XRO), Integrated Research Ltd (ASX: IRI) and Vista Group International Ltd (ASX: VGL) as peer group. Hence, we recommend a “Buy” rating on the stock at the current market price of $6.340, down by 1.116% on January 09, 2020. 

Over the Wire Holdings Limited

Significant Increase in NPAT: Over the Wire Holdings Limited (ASX: OTW) provides telecommunications, cloud and IT solutions to business clients. As on 9 January 2020, the market capitalization of the company stood at $227.73 million. In the recently held AGM, the top management stated that FY19 was the year of substantial growth. During FY19, the company witnessed a growth of about 50% in revenue to $79.6 million and an increase of 83% in NPAT to $10.1 million. This was mainly a result of customer retention. The decent financial performance of the company enabled the Board to pay dividends of 3.25 cents per share.


Financial Performance (Source: Company Reports)

What to Expect from OTW: The company will continue to identify acquisition targets and is aiming for an organic revenue growth of over 15% in FY20. The company is also focusing on operational efficiencies and is expecting to realise synergies from its acquisitions. OTW is also working on improving the experience of its customers.

Valuation Methodology: EV/Sales Multiple Approach

EV/Sales Relative Based Approach (Source: Thomson Reuters)

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

Stock Recommendation: Over the period of FY15 to FY19, the company witnessed a CAGR of 49.01% in revenue. During FY19, Return on Equity stood at 22.5%, higher than the industry median of 15.7%. This indicates that the company is well deploying the capital of its shareholders and is able to generate profits internally. The company also reported a financially stable balance sheet with Debt/Equity at 0.17x, lower than the industry median of 0.56x. Considering the CAGR in revenue, high ROE, stable balance sheet and decent financial performance, we have valued the stock using EV/Sales based valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $4.40, down 0.227% on January 09, 2020. 

Splitit Payments Ltd

Strong Black Friday Sales: Splitit Payments Ltd (ASX: SPT) provides credit card-based instalment solution to businesses and merchants. As on 9 January 2020, the market capitalization of the company stood at $204.05 million. The company recently announced that it has performed well over the Black Friday and Cyber Monday holiday period with record underlying sales of more than $1 million a day. It also stated that Average Order Value (AOV) for the same period rose to US$820.

The company reported strong growth across all its key metrics during the quarter ended 30 September 2019, where total merchants of the company reached 624, representing an increase of 97% on pcp. New merchants include well-known brands, for instance, Kogan.com, Philips Respironics and Ableton. For the same period, Merchant Transaction Volume of the company stood at US$30.5 million, up 100% on pcp.


Splitit’s quarterly performance across key metrics (Source: Company Reports)

Growth Opportunities: The company will continue to execute its growth strategy which revolves around acquiring new large merchants and building strong partnerships with eCommerce platforms, payment processors, technology services, point of sale providers, banks and large multinational corporations in order to scale at a faster rate. It is also targeting eCommerce merchants having high credit card use across various countries.

Stock Recommendation: As per ASX, the stock of SPT gave a return of 27.18% in the past 6 months and a return of 4.8% in the last 3 months. The stock is also inclined towards its 52-week low level of $0.305, offering a decent opportunity for accumulation. Over the span of 3 years, the company has witnessed substantial improvement in its EBITDA margin and net margin. Considering the returns, trading levels and modest outlook, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.660, up by 0.763% as on 09 January 2020.

Xref Limited
Xref Successfully Completes $3.47 million Placement: Xref Limited (ASX: XF1) is an online, automated solution that delivers data-driven candidate insights, and the customer-centric platform, offering flexibility and scalability clients need to hire the best talent. The company has recently announced that it has received commitments from institutional and professional investors to raise around $3.476 million before costs through placement of 10,533,333 fully-paid ordinary shares. The placement price of $0.33 represented a 10% discount to the last closing price prior to the trading halt.

Record Credit Usage and Cash Receipts: The company has recently released its quarterly report for Q1 FY20 or quarter ending 30 September 2019, wherein it reported a record credit usage of $2.24 million and cash receipts of $3.53 million. In the same time span, sales increased by 23% to $2.46 million.


Credit Usage and Credit Sales (Source: Company Reports)

Stock Recommendation: As per ASX, the stock of XF1 gave a return of 4.17% on YTD basis and is trading close to its 52-week low of $0.310, offering a decent opportunity for accumulation. In the span of 4 years from FY15 to FY19, the company has witnessed strong improvement in its net margin. During FY19, the current ratio of the company stood at 1.31x as compared to the previous year’s ratio of 1.22x. This indicates that the company is now in a better position to pay off its current liabilities using its current assets. Considering the returns, current trading levels, improvement in net margin and decent outlook, we recommend a “Speculative Buy” rating on the stock at the current market price of $0.350, down by 6.667% on January 09, 2020. 

 
Comparative Price Chart (Source: Thomson Reuters)

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