Class Limited

CL1 Details

Issue of Performance Shares: Class Limited (ASX: CL1) is a developer and distributor of Class Super and Class Portfolio, cloud-based accounting software for investment reporting, corporate compliance, funds’ administration. On 18 October 2021, CL1 issued 39,307 deferred share rights and 361,446 performance rights to Andrew Russell, a key management personnel (KMP) under an employee incentive scheme. CL1 notified the retirement of Ms. Kathryn Giudes (Foster) on 18 October 2021.

Acquisition Proposal by HUB24:

• On 18 October 2021, CL1 and HUB24 Limited (ASX: HUB) signed a Scheme Implementation Deed (SID) wherein HUB will acquire 100% issued capital of CL1.
• As per the Scheme, each CL1 shareholder will be entitled to get
• 1 HUB share for every 11 CL1 ordinary shares held
• $0.10 cash amount for every ordinary share held in CL1 at the record date
• Any interim dividend of up to 2.5 cents per share (cps) as announced by CL1 for 1HFY22
• HUB offers $3.11 per share as the price consideration under the SID agreed as of 18 October 2021.
• The Board of CL1 recommends that shareholders vote in favor of the Proposal in the absence of a better offer and based on the opinion of an Independent Expert concluding that the Scheme is in the best interests of shareholders.
• CL1 will operate with its leadership team and brands in HUB as a distinct business unit in the Group post completion of the transaction.
• CL1 will submit the draft Scheme Booklet to ASIC during mid-late November 2021. The companies plan to set a Scheme Record Date in Early February 2021 with an Implementation Date Mid-late February 2022.

FY21 Results:

• CL1 acquired two businesses in the corporate compliance space and met the revenue & EBITDA targets as declared in FY21.
• The company is in year II of its implementing plan and 3-year Reimagination Strategy by developing new revenue streams, increasing scale, and TAM (Total Addressable Market).
• The company invested $16.9 million in product and platform improvements during the year.
• The Statutory NPAT declined by 46% Y-o-Y to $3.66 million in FY21.
• The free cash flows rose by 19% YoY to $10.6 million. CL1 collected $58.73 million receipts from customers during the year as compared to $48.21 million last year (FY20).

Total Revenue & Net Income Trend from FY18-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of integration, COVID-19 impact, customer retention & acquisition risk, and technology changes impacting the smooth functioning of the business.

Outlook:

• The ongoing acquisition transaction with HUB is expected to close in Q1CY22.
• The company has provided revenue guidance of $65 million, up by 18% on FY21 and $25 million EBITDA, an increase of 19% on pcp in FY22.

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 stock of CL1 gave a positive return of ~61.49% in the past month and a positive return of ~81.87% in the past six months. The stock is currently trading above than the 52-weeks’ average price level band of $1.405 - $3.060. The stock has a support level of ~$2.650 and a resistance level of ~$3.05. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price with a correction of high single-digit (in % terms). The company might trade at a slight premium than its peers, considering its decent financial performance in FY21, earnings’ forecast for FY22, recent launch of Class Trust, and EPS accretive acquisitions in the last two years. For this purpose of valuation, few peers like LiveHire Limited (ASX: LVH), Bigtincan Holdings Limited (ASX: BTH), Readytech Holdings Ltd (ASX: RDY), and others have been considered. Considering the high trading levels, decent rise in share price in the past three months and the past six months, valuation, and key business risks, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $2.980 on 2 November 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

CL1 Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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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