Stocks’ Details

ELMO Software Limited

FY20 Results Update: ELMO Software Limited (ASX: ELO) is an HR technology company that provides innovative cloud HR, payroll and rostering/time and attendance technology. For the year ended 30 June 2020, the company reported record annualised recurring revenue (ARR) of $55.1 million, up 19.7% on the previous year, driven primarily by organic growth from new and existing customers. Further, the company reported a statutory revenue of $50.1 million, up 25% on the previous year. Over the year, the company’s customer base grew to 1,682 organisations and average modules per customer increased from 2.4 to 2.7. It is worth noting that over the last three years, the company’s ARR and statutory revenue have grown at a CAGR of 33%.

Statutory Revenue and ARR (Source: Company Reports)

Key Risk: The company is exposed to credit risk, liquidity risk and market risk, arising from financial assets and liabilities.  The company is exposed to the risk of changes in foreign exchange rates. 

What to Expect: With a cash balance of $139.9 million as at 30 June 2020, the company seems well-capitalised to continue investing in both organic growth and strategic acquisitions. In FY21, the company intends to maintain its focus on delivering organic growth supplemented with strategic acquisitions. The company expects its FY21 ARR to be in the range of $65 million and $70 million. Further, the company expects FY21 revenue to be between $57 million and $61 million. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Key Recommendation: The stock of ELO has corrected by 18.05% in the past three months and is trading slightly higher than the average 52-weeks price level band. On the technical analysis front, the stock has a support level at ~$5.3 and resistance at ~$7. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like Integrated Research Ltd (ASX: IRI), LiveTiles Ltd (ASX: LVT), Nitro Software Ltd (ASX: NTO). Considering the company’s decent FY20 results, FY21 guidance, and decent capital position, we give a “Hold” recommendation on the stock at the current market price of $5.81 on 14 August 2020.

EML Payments Limited

Director Share Sales: EML Payments Limited (ASX: EML) develops tailored payment solutions for brands and their customers. Mitsubishi UFJ Financial Group Inc (Mitsubishi) recently became a substantial holder in the company by holding a5.0% interest in the company. Mitsubishi now holds 18,014,227 fully paid shares of the company. Recently, the company’s Chairman, Peter Martin, disposed 400,000 fully paid ordinary of the company via on-market trade. Mr Martin is a long-term investor in EML, having acquired his initial stake in 2012. He now holds 7,318,992 fully paid ordinary shares of EML.

Trading Update: In an update provided 20 May 2020, the company informed for the nine months ended 31 March 2020, the company reported Gross Debit Volume (GDV) of $9.83 billion, up 55% on the previous corresponding period (pcp). For the period, the company reported EBITDA of $27.0 million, up 24% on pcp. The company reported revenue of $87.1 million, up 20% on pcp. In the month of April, the company’s results were impacted due to social mobility and social distancing restrictions. For April 2020, G&I segment GDV stood at $31.4 million, down by 53% on the pcp.

Performance Summary for Nine months to 31 March 2020 (Source: Company Reports)

PFS Acquisition Update: On 1 April 2020, the company completed the acquisition of Prepaid Financial Services (Ireland) Limited, a multi award winning European provider of white label payments and banking-as-a-service technology. With this acquisition, EML has become more diversified business and a business that can generate the majority of its revenue from General Purpose Reloadable (GPR) products. In April, PFS contributed GDV of $395.3 million to a total segment GDV of $681.8 million.

Key Risks: The company is exposed to the risks and uncertainties of Covid-19 as it could cause malls to close down, which could impact the company’s operational performance. The company is also exposed to the risks related to the changes in foreign exchange rates, interest rates and equity prices, which could affect the company’s income or the value of its holdings of financial instruments.

What to Expect: The company expects that the gradual opening of malls and easing of Covid-19 restrictions in various countries will improve the trading conditions. The company has been investing in EML Connect, a software platform that enables mall customers to further extend their sales reach beyond the physical mall property and into online, digital and B2B sales. With its robust balance sheet, the company seems well-positioned to continue to invest in growth and take advantage of upcoming opportunities. The company expects to release its FY20 results on 19 August 2020. 

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of EML has corrected by 43.64% in the past six months and is trading near the average 52-weeks price level, offering investors an opportunity for accumulation. On technical analysis front, the stock has an immediate support level of ~$3.09 and resistance of $3.7. For H1FY20, the company reported Debt to equity multiple of 0.02x, lower than the industry median of 0.5x. We have valued the stock using the EV/Sales multiple based illustrative relative valuation approach and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like Tyro Payments Ltd (ASX: TYR), Pushpay Holdings Ltd (ASX: PPH) and FlexiGroup Ltd (ASX: FXL). Considering the company’s decent trading performance, gradual opening of malls and easing of Covid-19 restrictions in various countries, its recent PFS acquisition and current trading level, we give a “Hold” recommendation on the stock at the current market price of $3.29, up by 6.129% on 14 August 2020.

Xref Limited

Resilient Performance in June Quarter: Xref Limited (ASX: XF1) is involved in the development of human resources technology that automates the candidate reference process for employers. The company has a large addressable market which includes 80 million employees in North America, 120 million employees in Europe and 15 million employees in Australia and New Zealand. During the June 2020 quarter, the company was able to report decent results, despite the impact of COVID-19. For the quarter, the company reported total sales of $2.7 million with cash receipts of $2.4 million. Over the quarter 60 new clients joined Xref. Net cash outflow from operating activities stood at $597k. At the end of the June quarter, the company had cash and cash equivalent of $2.9 million.

Credit Sales (Source: Company Reports)

Secured a Major Client - H&R Block: On 13 August 2020, the company announced that its ID-checking business Rapid ID Pty Ltd has won a major new client - H&R Block, tax accountancy firm in Australia. Rapid ID will be performing industry-essential ‘Know Your Customer’ and Anti Money Laundering checks on H&R Block’s retail business.

Secures New Debt Facility: To support its growth strategy, the company recently entered into a new four-year secured $5 million debt facility with PURE Asset Management Pty Ltd, which will provide XF1 additional working capital. With this new debt facility, the company seems well-placed to leverage the global opportunity as the employment market recovers from the impact of COVID-19.

Capturing Growing Market Demand: The COVID-19 pandemic has accelerated global demand for remote working. Due to this, employers are now looking for improved ways to perform candidate verification. The company is now focused on capturing this growing demand.

Key Risks: The company is exposed to market risk through its use of financial instruments and specifically to currency risk, interest rate risk and certain other price risks, which result from both its operating and investing activities.

Stock Recommendation: The stock of XF1 has corrected by 24.0% in the past six-months and is inclined towards its 52 weeks low price, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level at ~$0.131 and resistance at ~$0.22. On a Trailing Twelve Months (TTM) basis, the stock of XF1 is trading at an EV/Sales multiple of 3.3x, lower than the industry average of 40.9x and thus seems undervalued. Considering the current trading levels, its resilient performance during June 2020 quarter, and its recently secured debt facility, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.185, down by 2.632% on 14 August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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