MYOB Group Limited (ASX: MYO)

Investing for future Growth - MYOB is a leading provider of online business management solutions that accelerates the development of its online platform to win new accounting practices that will lead to a corresponding increase in SME referrals. The Group has invested more than $400 million over the past 3 years into sales, marketing and R&D to drive subscriber growth, ARPU and retention. This could have been seen from its rate of online subscriber additions which trebled in this period and generated a free cash flow of $400 million, out of which $190 million was returned to shareholders. It continues to focus on lifting its presence in the adviser space but plans to pursue this through organic growth. It was observed that more than 50 per cent of new SME Software purchases came from accountant and other adviser referrals. Over past 8 years, the penetration of online accounting increased from more than 5 per cent to more than 40 per cent and it is expected that in the coming 8 years it will increase to more than 80 per cent. It will make an investment of up to $50 million in R&D in 2018-2020 to accelerate the delivery of MYOB Platform.
 

Free Cash Flow (Source: Company Reports)

The Group had earlier indicated that it expects an Underlying EBITDA margin of 42 per cent to 44 per cent in FY18 and more than 45 per cent by FY2020. It is targeting to account for 1 million of online subscribers by FY2020. The Group will also accelerate the rate of its share buy-back program. It is still on the track to achieve an organic growth between the range of 8per cent-10 per cent. All the investments made by the Group are NPV Positive on a standalone basis. With a proven track record of investing for growth, and a market ripe for expansion, the Group is confident that this is the right time to invest and set its business up for future success, whilst continuing to deliver value to its shareholders and customers.

While all the things seem to be falling in place, however the stock plunged by 8.17% on May 31, 2018 as the group came up with the decision that it will no longer pursue the acquisition of Reckon’s Accountant Group assets and instead, MYOB will proceed with its planned investment strategy to drive future growth. This agreement had a six-month duration within which the conditions precedent to completion had to be satisfied and if any of the party breached any condition then either Reckon or MYOB could terminate the contract. So, the rationale for the acquisition remained unchanged and further potential delays in the ACCC and NZCC process has created uncertainty in the business to be acquired as it could also have an impact on its trading, and the parties could not agree to mutually acceptable terms to extend the contract. The expiration of the six-month period for completion of requisite conditions derailed MYOB from going ahead with the acquisition and this led to a wave of disappointment among investors. The stock price was already down by 12.82 per cent in last one year and by 12.32 per cent in last six months. We give a “Hold” recommendation at the current market price of $2.81 while the management is still confident on witnessing growth in H2 FY18 from its Investment Growth initiatives.
 
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