Class Take Up Slows But Brokers Comfortable

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Pending superannuation reforms have slowed the take-up of new cloud-based offerings from Class Ltd, although brokers assert the company still has a strong and attractive product.

-Superannuation reforms currently affecting the timing of customer decisions
-Sales campaign successful in pulling demand forward
-Regulatory reforms and requirement for real-time reporting to drive the business
 

By Eva Brocklehurst

In a trading update, Class Ltd ((CL1)) has reinforced its proposition for accountants that process self managed super funds (SMSFs). Still, brokers are keenly aware that the impact of superannuation reforms has slowed momentum in taking up new cloud-based offerings.

Class, unlike its main competitor, does not have an existing base of desktop customers that it can convert when overall industry growth is low. As a result, UBS reduces its forecasts for account additions to 23,000 for FY18 and 29,000pa for FY19-21, from an estimate of 33,000 for each year previously.

The broker expects a slower, but still significant, increase in market share, rising to 45.5% by FY27. Nevertheless, the positives are considered to be factored into the current share price and UBS downgrades to Neutral from Buy.

Brokers are confident the company provides a software solution with long-term recurring revenue and strong customer retention. The platform is highly scalable, which should mean margins continue to expand.

The trading update indicates Class has added 3,300 SMSF subscribers so far in the second quarter, helped by a current promotional campaign offering a 6-9-month free subscription period. The market had been concerned about net additions in the second quarter following a soft first quarter.

Moelis, not one of the eight stockbrokers monitored daily on the FNArena database, upgrades to Buy with a target of $3.07. The broker assesses headwinds, such as superannuation reforms affecting the timing of customer decisions and the expected loss of around 11,000 AMP accounts, are now factored into the share price and envisages valuation support at current levels.

Adverse regulatory impacts are expected to subside early in FY19 and accountants and administrators will be able to reconsider software purchasing decisions. The broker's proprietary industry research suggests Class Super is the best admin platform available in the market in its segment.

The update was better than Ord Minnett feared. The broker believes a recently-launched sales campaign has been successful in pulling forward demand to a period that is less disrupted by changes to superannuation. This reinforces a strong value proposition and the fact the company may not yet have reached its limit in terms of the addressable SMSF opportunity.

Ord Minnett expects continued volatility in portfolio growth rates over the next couple of quarters but considers the stock at an attractive entry point on a medium-term view.

AMP Funds

AMP's ((AMP)) SuperConcepts, which are around 6% of Class revenues, have been consolidated to one licence from four, suggesting departure of those funds could be imminent. Class expects to lose the funds to AMP's competing platform but has not received any notice regarding the timing.

UBS assumes the accounts are lost from July 1, 2018. Ord Minnett believes the window for moving a significant book of funds closes by the March quarter and, given AMP has not yet provided the requisite 90-day notice, envisages reduced risk that these funds will move out in FY18.

Regulatory Changes

Wilsons expects the recent regulatory changes around SMSF and the need for real-time reporting will be a positive driver for the company by FY19/20. The valuation, currently at over 30x FY18 estimates, is worth paying for, in the broker's opinion, given the prospect that SMSF net additions could overshoot materially in the medium term.

The move towards real-time reporting for SMSFs should drive a significant uplift in cloud additions. The company has also alluded to expansion into financial planning which will support an increase in its addressable market. Still, the clear driver of the business remains with the cloud. Wilsons, also not one of the eight, retains a Buy rating and $3.57 target.

FNArena's database shows two Buy ratings and one Hold (UBS). Morgans is yet to comment on the trading update. The consensus target is $3.33, suggesting 41.8% upside to the last share price.
 

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