Small Caps | Apr 12 2018
As the migration of AMP accounts continue and the easy wins in cloud conversions pass, Class is likely to experience a more subdued period over coming months.
-UBS finds little evidence to support a large downgrade to future expectations
-Customer acquisition growth slows to lowest level in five years
-Wilsons suggests the valuation does not reflect margin pressures
By Eva Brocklehurst
The near-term outlook for SMSF software provider, Class ((CL1)), has become a little more uncertain, although brokers disagree on the extent of any downside.
The company still has 8,800 AMP-based accounts to be migrated over 2018 and growth in the March quarter was affected by the migration of 1,000 AMP accounts off the Class Super platform. Class added more than 6,102 portfolios in the quarter, taking its total to 164,255, up 3.9%.
The company did not provide an update to the earnings guidance provided at its first half result release, which signalled margins would be flat in the second half. UBS expects higher costs and a fee holiday until July 1, 2018 will affect FY18 revenues by -2% and flow on to margins.
The broker also suspects implementation costs could exceed sales as a result of competitive intensity and the attempts to capture desktop/cloud conversions from a major competitor. The chance of another fee holiday in the second quarter of FY19 is also elevated, in the broker's opinion.
UBS expects Class to lifted share of the SMSF market to 45% from 25% over the next decade although revenue is likely to be effectively flat.
The March quarter was a tad softer than expected but Ord Minnett is attracted to the growth profile, unit economics and low customer churn of Class and expects reasonable growth in the fourth quarter.
Future Expectations Revised Down
Based on the share price performance lately the broker was rather surprised by how quickly future growth expectations were revised down, with little real evidence this was playing out to any degree. Ord Minnett just doesn't envisage a decline in the base business to justify taking the stock down further and reiterates a Buy rating.
Moelis, too, remains comfortable with the long-term view, given consistent retention rates and high cash conversion as well as a scalable platform, maintaining a Buy rating with the target reduced to $2.99 from $3.22. The broker, not one of the eight monitored daily on the FNArena database, estimates around 2,800 AMP accounts will be migrated in the coming quarter.
Moelis acknowledges customer acquisition growth also slowed, as Class brought on 25 new customers in the quarter, the lowest over the last five years. The March quarter is usually the weakest of the year so the broker suggests keeping an eye on this metric going forward.
Portfolio account growth estimates for FY19-21 are reduced by -1.8-4.2% to reflect the increased probability of slower customer acquisitions and, while FY18 is seen as a more disruptive year, Moelis expects FY19 to be more stable, with earnings-per-share growth of 30%.
Early Wins Achieved
Wilsons downgrades to Sell and remains concerned about a likely re-basing of operating margins that is not factored into consensus estimates. The broker believes the early market wins have been achieved and, with the majority having adopted the cloud, the late comers that are moving on board may prove tougher to convert, requiring more investment.
The valuation does not reflect margin pressures and, moreover, the broker suspects AMP contracts could migrate at a faster rate ahead.
The product suite may be the best in its class, and there are supportive structural drivers around the cloud, but it is not enough to convince Wilsons, also not one of the eight brokers monitored daily on the database. Forecasts are downgraded by -9% for FY19 and the target price has been adjusted down to $2.05.
The database shows two Buy ratings and one Hold (UBS). Morgans (Buy) is yet to report on the update. The consensus target is $3.20, suggesting 42.2% upside to the last share price.
See also, Class Makes Progress Despite Competition on February 13, 2018.
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