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Mid-Cap

Two Growth Stocks to Buy - Xero + Flight Centre

October 22, 2015 | Team Kalkine
Two Growth Stocks to Buy - Xero + Flight Centre

XERO Ltd



Ongoing subscriber’s growth and partnerships: XERO FPO NZ (ASX: XRO) total subscribers base in Australia and New Zealand expanded and reached 400,000 in number of subscribers in September 2015, indicating a growth of 44% against 277,000 subscribers in September 2014. Xero now has over 540,000 customers across the world. The group’s touch app downloads surged 82% on a year over year (yoy) basis to 470,000. Xero also generated a revenue growth of 77% to $123.9 million in the 2015 fiscal year as compared $70.1 million in FY14. Xero continues to focus onUS, and accordingly its US customers delivered an outstanding growth of 300% during the second half of the year.


Investment Scenario (Source: Company Reports)

IDC recognized Xero as the fastest growing company in the payroll accounting area which represents 74.7% year over year revenue growth in 2014. Xero forecasts its subscription revenue to be more than NZ$200 million for 2016 fiscal year (according to June 2015 FX rates). The achievement of surpassing the milestone of 100,000 subscribers in the UK has also been important for XRO. Xero has also been able to exhibit immense potential in terms of the technology disruption with a wave in the accounting profession.

Strengthened relationship and Change in Auditor: The recent alignment with the Australia’s largest business bank, National Australia Bank Ltd. (ASX: NAB) for streamlining and expediting the approval process for business loans is indicative of great potential yet to be unveiled for Xero. Primarily, the two entities have linked the technology platforms in order to enable XRO’s clients to receive faster approvals for business loans when they allow NAB to access respective balance sheet data. Xero also informed about the resignation of PricewaterhouseCoopers as the external auditor of the company and its subsidiaries. However, PwC will be providing accounting and advisory services to the company and also would be able to recommend XRO’s offerings to private businesses.
 

Leading Growth (Source: Company Reports)
 
Stock Performance: The group generated an outstanding return of 16.3% in the last four weeks (as of October 22, 2015), and we remain bullish on the stock given its growth potential at the current price of $14.85.

 
XRO Daily Chart (Source: Thomson Reuters)
 

Flight Centre Travel Group Ltd



Solid TTV Growth: Flight Centre Travel Group Ltd (ASX: FLT) revenues improved by 6.8% year on year (yoy) to $2.4 billion for the fiscal year of 2015 despite tough market conditions, driven by significant total transaction value improvement by 9.7% yoy to $17.6 billion. However, the underlying profit slipped by 3.4% on the prior year. Even there was a fall in the net margins by 28 basis points owing to issuance of two profit warnings. The company maintained the dividends as paid in prior year and accordingly, the total dividends paid were of the order of 152 cents per share. Australia’s TTV surged to $9.6 billion in FY15, from $9.1 billion in pcp, while the group recently achieved a new TTV milestone across all of its 10 countries and regions. UK and Ireland, USA, South Africa and Singapore achieved record earnings before interest and tax during the period leading to >$100million overseas EBIT for the first time. FLT is well positioned to tap the booming international traffic across Australia through its wide product ranges, Omni-channel capabilities and brand diversity. Leisure travel is also picking up with increasing customer enquiries than expected, giving short term respite. The recent news entails around Flight Centre’s efforts to be in negotiation with five separate travel groups despite the turbulence in the leisure travel sector. We feel that the digital business along with the store format has good potential coupled with the expansion of the international business footprint.

 
Historical General cash/ Gross debt (Source: Company Reports)
 
Stock Performance: The group has a P/E of 15.25x and a decent dividend yield of 3.91%. We reiterate our “BUY” recommendation to the stock at the current price of $38.68.

 
FLT Daily Chart (Source: Thomson Reuters)
 
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