MYOB’s Year Of Reckoning

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Accounting solutions business MYOB has reaffirmed guidance for revenue growth of 13-15% and announced the acquisition of the Reckon Australasian accountant group.

-Dilutive to earnings in early years given the reinvestment
-Enlarged accountant group should accelerate SME growth
-Buyback commitment reiterated, but if fully realised could stretch balance sheet
 

By Eva Brocklehurst

MYOB ((MYO)) has emphasised the importance of accountant referrals for its SME solutions business and, hence, intends to acquire the assets of the Reckon ((RKN)) Australasian accountant group.

The company has also re-affirmed full year guidance for revenue growth of 13-15% and operating earnings (EBITDA) margins of 45-46%. R&D expenditure is expected to be towards the top of the 13-16% of revenue range.

Management has stated that 50% of SME product sales come from referrals and another 25% are influenced by advice from an accountant. Hence, with users of the company's practice management software more likely to recommend its products to SME clients, brokers concede there is a clear strategic rationale behind the acquisition of the Reckon accountant group.

The transaction strengthens the adviser base, with more than 3000 accounting practices. There is an expectation the larger base will lead to more referrals and accelerate online subscriber growth.

Citi found the acquisition no major surprise, given the history between the two companies. The broker also considers the $180m price reasonable and the merger rationale sensible, given the opportunity to extend the accountant network.

While estimating around 5-8% underlying earnings accretion in FY19-20, the broker lowers estimates for FY17-18 by -1-4% ,to incorporate reinvestment and expenditure on the merger. Citi considers the stock's valuation compelling, given the company's strong market position, favourable industry structure, high recurring revenue and cash generation.

Macquarie does not assume revenue synergies from the transaction and considers this to be a potential for upside, if conversions come to fruition. The broker believes the company's balance sheet is stretched, facing elevated risks in development and legacy upgrades over the next few years.

Significantly, management has indicated that there was limited access to the Reckon customer lists which means that client overlap and attrition is difficult to determine.

Share of accountant recommendations is the critical factor in determining the share of new SME cloud subscribers, UBS asserts. The enlarged accountant practice should, in theory, accelerate SME growth given the larger referral network, particularly if accountant group clients are migrated to MYOB's online solutions.

Simplistically, assuming the existing base transfers to MYOB products over time UBS calculates this to deliver $16m in long-term revenue/operating earnings upside. The could be extra benefits as well, from referring existing desktop users to the MYOB cloud function.

Reinvestment

The company will set up a $50m integration fund as part of the acquisition, to accelerate development of the existing platform. The majority of the funds will be invested to develop online practice tools rather than migrate the accountant group clients.  On this basis, Deutsche Bank calculates R&D as a percentage of revenues will be close to 20% for the next two years before getting back to 16%.

While the deal may be accretive to earnings at an underlying level UBS is conscious that it excludes the $50m of integration costs to be funded from cash flow and all of the operating earnings in year one and two are being reinvested in sales and marketing. UBS expects gearing to lift to around 3.0x net debt to earnings and for margins to dip in FY18 versus FY17, as a result.

Macquarie agrees the acquisition is dilutive to earnings in the early years given the reinvestment and the integration fund and calculates it becomes accretive in the low single digits from FY19. If added to the existing R&D budget, this equates to around 20% of revenue being spent on R&D over the next two years, in line with Deutsche Bank's assessment.

Buyback

Despite elevated gearing after the transaction, management has reiterated a commitment to the buyback. Yet Macquarie pulls back execution of the buyback in its forecasts, believing it prudent to exercise restraint on this initiative given the projected level of gearing, which would breach 3.0x earnings if the buyback is fully executed. Pre-transaction gearing was 2.2x.

FNArena's database shows three Buy ratings and three Hold. The consensus target is $4.08, suggesting 11.2% upside to the last share price.
 

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