Class Limited

CL1 Details
 
Reported Revenue Growth of 8% on y-o-y:Class Limited (ASX: CL1) is a cloud-based company, which operates in self-managed superannuation fund administration software solutions and services.
 
H1FY20 Operational Highlights for the Period ended 31 December 2019: CL1 declared its half-yearly results, wherein the company reported operating revenue of $20.5 million, up 8%. The business reported its total number of customers at 1,576, higher from 1,470 in H1FY19. Class Portfolio accounts stood at 8,875, as compared to 6,581 in the previous corresponding period. During H1FY20, customer retention by accounts stood higher at 98.9% on rolling 12 months basis. The business grew faster than the market with a market share of 28.4%, improved 3.1% on pcp terms. Costs of undertaking business stood higher by $1,511,000 due to higher investment in people and product to deliver the reimagination strategy. The company reported EBITDA at $8.1 million, down by 7% on pcp basis due to additional expense of $509k related to acquisition and corporate advisory costs associated with the NowInfinity acquisition and exploring other acquisition opportunities. The year was marked by higher investment in its product category of $5.5 million, grew by 25% on pcp terms. The company witnessed a positive progress on the pilot with more than 900 trusts added during the half.

Key Income Statement Highlights for H1FY20 (Source: Company Reports)
 
Balance-Sheet Highlights: The company reported total current assets of $22.5 million, witnessing a minor decline of $22.6 million in FY19. Cash and cash equivalent stood at $17 million, declined from $17.5 million as on 30^th June 2019. Investments and intangible assets stood at $3.2 million and $9.5 million as on 31^st December 2019. The business exited the half with total assets of $39 million and net assets of $30.6 million, respectively.
 
Dividend Update: The board has declared a fully franked dividend of 2.5 cents with a payment date of 27^th March 2020.
Guidance: As per the FY20 guidance, the company expects its revenue from NI product at around ~$7 million. The company is targeting a 40% EBITDA margin in the underlying Class business excluding acquisition & corporate advisory expenses.
Valuation Methodology: Enterprise Value (EV) to Sales Based Valuation

EV/Sales Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of CL1 was closed at $1.865 with a market capitalisation of $254.11 million. The stock is trading towards the upper band of its 52-week trading range of $1.150 to $2.360. Going forward, the company will continue to execute to the Reimagination Strategy through a combination of “Build, Acquire and Partner” model. In H1FY20, the company’s investment in core product development and technical capabilities stood higher by 25% pcp while the company is targeting a 14% revenue growth for FY20 including NowInfinity. Considering the current trading levels and business prospects, we have valued the stock using Enterprise Value (EV) to Sales based relative valuation method. For the purpose, we have taken peers like TechnologyOne Ltd (ASX: TNE), ELMO Software Ltd (ASX: ELO), etc., and arrived at a target price of lower single-digit upside (in % terms). Hence, we recommend a “Hold” rating on the stock at the current market price of $1.865 per share, down 9.903% on 18 February 2020, taking cues from the earnings release.
 
 
CL1 Daily Technical Chart (Source: Thomson Reuters)

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