Stocks’ Details
 

Xero Limited

Robust Growth in Operating Revenue:Xero Limited (ASX: XRO) provides online accounting software for small businesses. The market capitalisation of the company stood at $12.69 Bn as on 5^th June 2020. Recently, the company released its results for the year ended 31^st March 2020, wherein it reported net profit after tax amounting to NZ$3.3 million as compared to the loss of NZ$27.1 million in FY19. This turnaround was driven by the continuing growth in operating revenue, improved gross margin, and disciplined management of operating costs. For FY20, the company reported operating revenue of NZ$718.2 million with a rise of 30% due to subscriber growth in all markets.
During the year, the company was focused on maintaining the quality and continuity of its 100% cloud-based products and services while moving swiftly to launch numerous new customer and partner support services.


Financial Summary (Source: Company Reports)

Impact of COVID-19:The company stated that trading performance has been impacted by COVID-19 during the early stages of FY21. However, at this time, the company is not in the capacity to evaluate the full-year impact of coronavirus. The objective of the company revolves around to become a long-term oriented, high-growth business. XRO continues to operate with disciplined cost management and targeted allocation of capital.

Stock Recommendation:During FY20, the company has recorded decent performance in terms of business. The company continued to execute its strategy, which resulted in operational revenue growth of 30%. Despite the COVID-19 crisis, the company is committed to its three strategic priorities such as driving cloud accounting around the world, growing the small business platform, and to continue to build for global scale and innovation. The stock of XRO Limited moved up by 9.91% and 7.26% within the time period of three months and six months, respectively. Currently, the stock is inclined towards its 52-week high of $91.490. Therefore, considering the current trading levels, we give an “Expensive” rating on the stock at the current market price of $87.420 per share, down by 2.193% on 5^th June 2020.

Over the Wire Holdings Limited

Strong Demand for Voice Offering:Over the Wire Holdings Limited (ASX: OTW) is engaged in the provisioning of telecommunications, cloud and IT solutions to business clients. The market capitalisation of the company stood at $179.74 Mn as on 5^th June 2020. In a recent business update, the company stated that it has witnessed strong demand for its voice offering, resulting in higher volume due to social distancing restrictions caused by COVID-19. However, the company’s exposure to customers in industries (retail, hospitality, and travel) has experienced a hard hit. 

The company also entered a strategic partnership with NEXTDC, wherein OTW would migrate core elements of its network and private cloud infrastructure into the market-leading data centre providers Tier 4 facilities. During 1H FY20, the company reported total revenue from ordinary activities amounting to $42.9 million, reflecting a rise of 25% over the prior year. This indicated demand from customers across all four product lines.


Revenue Growth (Source: Company Reports)

Focus for Future:The company is focused on delivering strong organic growth and profitability in its recurring revenue streams. OTW is well placed to pursue further accretive acquisitions. The company is optimistic about achieving its second-half targets and delivering sustainable profit growth for shareholders.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation:The mobile product of the company is tracking well, and it would be launched in the latter part of Q4. Current ratio of the company stood at 1.02x in 1H FY20, reflecting YoY growth of 36.4%. This implies that the company has improved its position to address its short-term obligations. Debt to equity of the company stood at 0.16x in 1H FY20 against the industry median of 0.50x. We have valued the stock using the P/E multiple based illustrative relative valuation method andarrived at a target price with an upside of low double-digit (in percentage terms). Hence, considering the strong demand for voice offering, strategic partnership with NEXTDC, improved liquidity position and deleveraged balance sheet, we give a “Buy” recommendation on the stock at the current market price of $3.580 per share, up by 2.874% on 5^th June 2020.

Whispir Limited

Appointment of CFO:Whispir Limited (ASX: WSP) provides a communication workflow platform, which automates interaction between business and people. The market capitalisation of the company stood at $250.08 million as on 5^th June 2020. The company recently announced that it has appointed Justin Owen on the role of Chief Financial Officer. Mr. Owen possesses more than 30 years of experience in finance. WSP also appointed Ms Fiona Milne on the newly created role of Head of AI and Data. During Q3 FY20, the company recorded annualised recurring revenue amounting to $40.5 million, reflecting 29.4% over pcp. This was supported by increased platform use by existing customers & significant new customer growth. The company added 49 net new customers during Q3, which took the total customers to 558. During 1H FY20, the company reported a growth of 20% in its revenue.


Revenue (Source: Company Reports)

Guidance:For FY20, the company expects EBITDA to be in the range of ($7.9m) - ($7.4m), which is materially ahead of the Prospectus forecast of ($9.4m).

Stock Recommendation:Current ratio of the company stood at 2.41x in 1H FY20 as compared to the industry median of 1.82x. This indicates that the company is in a decent position to address its short-term obligations against the broader industry. WSP has EV/Sales multiple of 6.2x against the industry median (technology) of 4.2x on TTM basis. The stock of WSP is trading at a price to book multiple of 11.0x as compared to the industry median of 3.0x on TTM basis. As per ASX, the stock of WSP is trading towards its 52-week high of $2.800. Thus, it can be said that the stock of WSP is overvalued at current trading levels. 

Therefore, in light of current trading levels and valuation multiples, we have a wait and watch stance on the stock at the current market price of $2.400 per share, down by 0.415% on 5^th June 2020. We also suggest investors to wait for further catalysts to drive the stock.

 
Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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