ELMO Software Limited

ELO Details

1HFY22 Business Update: ELMO Software Limited (ASX: ELO) provides cloud-based solutions for small businesses and midmarket organisations to manage people, process and pay. During 1HFY22, the company recorded Annualised Recurring Revenue (ARR) of $98.3 million as compared to $74.2 million in 1HFY21.

• ELO posted a growth of 41% in revenue to $43.1 million during the period and recorded EBITDA amounting to $0.3 million.
• Cash receipts for the half-year rose by 63% to $56 million over 1HFY21. In addition, it witnessed a reduction of 36% in cash burn against 1HFY21. ELO seems to be well-capitalised, with a cash balance of $58.4 million as on 31 December 2021.

ARR Trend (Source: Analysis by Kalkine Group)

Key Risks: The company’s operational and financial performance could be impacted by the rising market share of peers in the industry. ELO is also exposed to risks arising from the extreme change in technology.

Outlook: For FY22, the company expects to report ARR in the range of $107 million -$113 million and revenue in the ambit of $91 million -$96 million. In addition, it expects to report an EBITDA of between $1.5 million-$6.5 million. The company has scheduled to release 1HFY22 results on 15 February 2022.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The company is trading below its 52-week low-high average of$ 3.745 - $6.950, respectively. The stock of ELO has been corrected by ~21.30% in the past three months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ average EV/Sales multiple, considering growing ARR and expected growth in financials, etc. For the purpose of valuation, peers such as Nearmap Ltd (ASX: NEA), Nitro Software Ltd (ASX: NTO), TechnologyOne Ltd (ASX: TNE), and others have been considered. Considering the expected upside in valuation, rising ARR, increasing topline, optimistic outlook, current trading level and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $4.000, as on 08 February 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

ELO Daily Technical Chart, Data Source: REFINITIV 

Spirit Technology Solutions Ltd

ST1 Details

1HFY22 & Q2FY22 Operational and Financial Summary: Spirit Technology Solutions Ltd (ASX: ST1) is involved in the provisioning of IT&T services, which include the provisioning of telecommunication services, cloud services, managed IT services and cyber security services. ST1 recorded a growth of 54% in total revenue to $66.2 million in 1HFY22 on a YoY basis.

• The company posted a record revenue of $35.3 million in Q2FY22, with a YoY growth of 28%, indicating strong organic sales growth in November and December 2021.
• Recurring/contracted revenue 1HFY22 soared by 66% to $34.3 million over 1HFY21. During Nov and Dec 21, it posted Total Contract Value (TCV) of $12.2 million and $13.6 million, respectively.
• Underlying EBITDA for the half-year moved down by 5% on a YoY basis to $4.2 million, which excludes $2.5 million profit from the sale of Consumer assets. As on 31 December 2021, the company had a cash balance of $17.4 million.

Revenue & Underlying EBITDA (Source: Analysis by Kalkine Group)

Key Risks: ST1’s business could be impacted by the risk arising from the failure in maintaining cybersecurity. The company continue to witness ongoing cost pressures, supply-side delays, and business disruptions due to Omicron.

Outlook: Looking forward, the company believes that it is well placed to capitalise on the ongoing structural changes occurring to the modern workplace in terms of cyber risk, remote worker needs, demand for data, cloud, and shortage of IT skills.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of ST1 is currently trading at par to its 52-week low level of 0.170, offering a decent opportunity for accumulation. The stock has been corrected by ~20.45% in the past one month. The stock has been valued using a P/E Multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the cost pressures, supply side delays due to Omicron. For the purpose of valuation, peers such as Uniti Group Ltd (ASX: UWL), TPG Telecom Ltd (ASX: TPG), Spark New Zealand Ltd (ASX: SPK), and others have been considered. Considering the expected upside in valuation, growth in revenue, decent liquidity position, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.170, down by ~10.527% as on 08 February 2022.

ST1 Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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