Australia | Jun 11 2015
This story features TECHNOLOGY ONE LIMITED, and other companies. For more info SHARE ANALYSIS: TNE
-Strong earnings growth
-Robust market share
-Established pricing regime
By Eva Brocklehurst
Accounting software provider MYOB ((MYO)) has taken its accounting platform to the cloud. The company has invested in the technology and must now ensure it captures a rightful share of users of desk top functions as they move to cloud-based services.
MYOB is ahead in this race, starting with an installed user base of 1.2m and brand recognition, as well as a dedicated software solution and strong distribution platform. Citi expects earnings growth of 19% on a three-year compound rate and believes the stock’s trading discount to global peers is unwarranted. The broker initiates coverage with a Buy rating and $4.00 target. Management has invested heavily in product, adding $24m in costs over 2012-14. Citi expects this investment will continue at a more modest pace, with cost growth running at around 4.0% compound out to FY17. Cost additions are considered a key investment risk in MYOB’s business.
Market share is concentrated and barriers to entry are high, Goldman Sachs observes. MYOB is benefiting from the shift to cloud-based software, which the broker notes has driven a 10% per annum growth in paying users since 2011 and increased customer lifetime value – where customers move towards subscription products as older products are no longer supported. Goldman Sachs initiates coverage with a Neutral rating, tempering its favourable view as the stock is trading close to the $3.56 target. The broker forecasts a 16% compound earnings growth rate over 2014-17.
The migration away from perpetual licences and towards subscription products has meant recurring revenue has risen to 94% of 2014 sales and resulted in improvement in MYOB’s client retention to 81%. MYOB has 505,000 current paying subscribers, of which 116,000 are in the cloud. With cloud-based growth the benefits are enhanced.
Where are the risks? These relate to new entrants and the potential for aggressive marketing and product pricing, in Goldman’s view. The broker has grouped peers into three sections. Firstly, operating peers are business software companies such as Technology One ((TNE)), Xero ((XRO)) and Reckon ((RKN)) as well as global entities such as Intuit and Sage. Other domestic peers are application software companies, such as Infomedia ((IFM)), Integrated Research ((IRI)) Iress ((IRE)) and Altium ((ALU)), as well as data processing and online businesses such as Veda Group ((VED)), Computershare ((CPU)) or Carsales.com ((CAR)).
Thirdly, there are established software business that operate as oligopolies such as Adobe, Microsoft, Oracle and SAP. Against a selection of profitable operating peers and domestic software peers MYOB screens broadly in line to mildly expensive in terms of its valuation, on both a growth adjusted and returns adjusted basis, in Goldman’s analysis.
The company expanded its offering into practice management to the accounting industry via acquisition of Solution 6 in 2004. MYOB entered the enterprise resource planning segment after acquiring Commac and Exonet in 2007. Enterprise solutions formed 13% of its 2014 revenue. R&D in recent years has produced products such as PayDirect – mobile payments integrated into SME software, Smart Bills – integrated supplier bills, and Australian Business Number checks.
MYOB and its main competitor, Reckon, have historically implemented annual price rises of around 5.0% for their SME products and 3.0% per annum for practice management products. Goldman does not believe this has had an adverse impact on business volumes, given the stagnant nature of relative market share. MYOB management expects to continue achieving such price rises, driven by increased functionality and a mix shift towards higher end products.
MYOB, which stands for “mind your own business”, launched its first desk top software in 1991. The company listed on ASX in 1999 and was taken private 10 years later. In 2011 it was sold to the current 57.7% majority shareholder, Bain Capital. The recent re-listing is aimed at raising the profile among small business, accountants and the broader investment community. Accounting software has a high portion of recurring revenue and a diverse customer base. MYOB has a dominant – around 60-65% – revenue share in Australia and New Zealand. The company has four main offices: Melbourne, Sydney, Christchurch and Auckland.
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