ELMO Software Limited

ELO Details

Update on Shareholder’s Interest: ELMO Software Limited (ASX: ELO) is engaged in providing cloud-based HR, payroll, expense management solutions, and operates on a Software as a Service (“SaaS”) business model based on recurrent subscription revenues.  In a recent update, the company informed the market that Lessem Trading Pty Ltd had decreased its voting rights from 12.7% to 12.19%. 

Change in the Director’s Interest: In another update, the company informed the market that Danny Lessem, a director of ELO (Direct Interest in the company), has acquired 149,328 fully paid ordinary shares for a value consideration of $4.5486 per share. 

FY21 Key Findings:

• Increase in Cash Receipts: In FY21, cash receipts stood at $79.8 million, up 38.8% on a year over year basis, aiding the company to achieve its goal and organic growth initiatives.
• Top & Bottom-line Details: Revenues increased by 38.1% year over year and came in at $69.1 million in FY21. The company reported a net loss of $37.6 million in FY21, up from a net loss of $18.6 million, owing to higher depreciation and amortisation, R&D and sales and marketing expenses.
• Robust Growth in Small Business Segment: With the acquisition of Breathe, the small business segment witnessed a significant growth of 51.8% year over year in FY21. In 2HFY21, the company added modules to the Breathe suite in the UK, which is likely to aid ELO’s customers to drive beneficial results around employee engagement, insights, and retention.
• Cash Rich Company: The company exited FY21 with a cash balance amounting to $81.94 million. The company’s total debt at the end of the period stood at ~$54 million.

ARR Highlights (Source: Company Reports)

Risk Analysis:  

• Mounting Losses: ELO’s net loss is increasing on a year over year basis. Hence, these mounting losses may throw tough challenges at the company’s overall functioning and may dampen margins in the future.
• Integration Risk: ELO continues to acquire many companies, which add to integration risks.
  

What to Expect:

• ELO expects a decent growth in ARR and revenue in FY21. ELO expects its FY22 ARR to be in the range of $105 million and $111 million.
• For FY21, ELO now expects FY22 revenue to be between $90.5 million and $95.5 million.
• EBITDA is expected to be in the range of $1-$6 million.

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: Over the last six months, the stock went down by ~11.33%. The stock is currently trading below the average of its 52-week low and high of $4.2 and $7.44, respectively. The stock has been valued using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ median EV/Sales, considering decent liquidity position, high customer retention rates, focus on delivering organic growth, and encouraging outlook. For the purpose of valuation, peers like Nearmap Ltd (ASX: NEA), Bigtincan Holdings Ltd (ASX: BTH), and Adacel Technologies Ltd (ASX: ADA) have been considered. Considering the strong management focus toward growth, new module adoption, synergies from strategic acquisitions, expansion into new geographies, positive long-term outlook, increasing losses, COVID-19 uncertainties, forex headwinds, and other key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $4.48 as on 23 September 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

ELO Daily Technical Chart, Data Source: REFINITIV 

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.

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.

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