Company Overview: Class Limited (ASX: CL1) is engaged in the development and delivery of cloud-based software solutions since 2009, for the Australian wealth accounting market. The company aims to offers a pioneering administration solution to automate physical workloads, thereby enabling accountants, administrators, and advisers to boost profitability, stimulate business growth and provide improved client service.

CL1 Details

CL1's Acquisition Spree Continues with ReckonDocs Buyout: Class Limited (ASX: CL1) is engaged in the provisioning of cloud-based self-managed superannuation fund administration software solutions and services. The market capitalisation of the company stood at ~$211.62 million as on 18 June 2021. In 1HFY21, the company’s annualised recurring revenue soared 24.6% on a year-over-year basis and came in at $48.6 million. Roll forward revenues in 1HFY21 increased 29.7% year-over-year and came in at $52.9 million. The company continues its scale of operations, with an enhanced focus on research and development, increased investment in people and products to deliver on its growth strategy. Operating revenue during the period came in at $25.83 million, depicting a rise of 27% year over year, primarily driven by the NowInfinity (including Smartcorp) business. EBITDA during the period came in at $10.4 million, indicating a rise of 29% on pcp. Moreover, the company maintained its EBITDA margin of 40% in 1HFY21. During 1HFY21, the company declared a fully franked dividend of 2.5 cents, thus enhancing shareholders’ value. The company’s customer base rose a whopping 183% year over year and reached 4,456 customers in 1HFY21. The increase in customer base was primarily due to NowInfinity, Smartcorp and, ReckonDocs acquisitions.

It is worth noting that the company unveiled its trust accounting product, Class Trust in October 2020, enabling financial advisers, accountants, and administration professionals to systematise trust administration process, thus making it more efficient and accurate. Class Trust is powering up to a 68% upturn in time efficiency gains for adopting customers. In addition to the robust financial performance, the company also invested significantly during the period to enhance its technological capabilities, sales & marketing resources, and expansion of product suite to promote long-term, sustainable growth for the business.

Revenues Trend; Analysis by Kalkine Group

Acquisition Remains a Key Growth Strategy: CL1 is on an acquisition spree to boost its cloud business and capabilities to support new products and expand its foothold in new markets. On 13 August 2020, the company announced the buyout of 100% of the shares in Assuriti Pty Ltd (Smartcorp) for the consideration of $4.2 million. The consideration was comprised of $2.73 million on completion and $1.47 million in Class shares escrowed for 18 months. On 31 January 2020, CL1 acquired 100% of the shares in NowInfinity 3505 Pty Ltd. The NowInfinity acquirement marks a key milestone for CL1 to evolve as a unified multi-product offering to its professional services customers, thus decreasing its dependence on the SMSF market.

In early 2021, the company acquired ReckonDocs platform and customer base, for an enterprise consideration of $13 million. The buyout is expected to contribute circa $1.0 million in revenue in FY21 and $4.0 million in FY22. Notably, including the impact of the acquisition, the company expects the EBITDA margin to be ~60% in FY22 and EPS accretive in the same year. ReckonDocs offers a certification and corporate agreement platform to more than 2,000 accountants, advisors, and other professional service providers. The company’s registrations, trust deeds, and SMSF deeds are well integrated with Class’ NowInfinity platform. The buyout will provide an opportunity to leverage NowInfinity platform to scale CL1’s overall business. This marks the company’s third acquisition, subsequent to the buyouts of NowInfinity and Smartcorp.

Key Metrics, Healthy Balance Sheet, and Decent Liquidity: The company has a strong financial position with a cash balance amounting to $14.06 million at the of 1HFY21, reflecting the robust cash generative nature of the business. Total debt at the end of the period stood ~13 million. Net cash from operating activities came in at $7.64 million in 1HFY21, up from $6.68 million reported in the year-ago period. A healthy balance sheet will help the company to attain its long-term objectives and will aid the company to enhance its shareholder’s value and pursue a further strategic acquisition.

In 1HFY21, the company’s EBITDA margins stood at 40.9%, higher than the industry median of 30.7%. ROE stood at 7.6% in the same time span, higher than the industry median figure of 4.3%. In 1HFY21, the company recorded cash cycle days of 29.7 compared to the 1HFY20 figure of 39.1 days.

Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 62.92% of the total shareholdings, while the top 4 constitutes the maximum holding. Spheria Asset Management Pty Limited held the maximum number of shares with a percentage holding of 19.21%, followed by Troncell Pty. Ltd. holding 11.82%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: Stiff competition is expected to rise as market competitors grow in number and the current ones develop their product lines and services with modernised technologies to entice customers and maintain the present ones. Thus, retaining robust and long-term customer relationships is a tough task in the midst of stiff competition. CL1 is acquiring many companies, which results in some integration risk. Also, regular acquisitions are a diversion for management, which could impact organic growth. CL1 operates in a highly competitive environment, subject to ongoing significant changes, including business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures. 

What to Expect: The company remains on track to implement its growth strategy with both financial and operational results in focus. In doing so, the company maintains a good track record to acquire companies and integrating them well as demonstrated by both NowInfinity and Smartcorp in 2020. For FY21, the company is expecting to report a growth of 22% in revenue to $54 million, which includes ReckonDocs buyout. Underlying EBITDA margin is targeted to be ~40%. Additionally, the company has expanded its Total Addressable Market by 2.5X, from $140 million in FY19 to $365 million in FY21. This places the company’s business for accelerated growth in FY22 and beyond. Going forward, the company’s growth strategies, expansion of product suite, acquisition synergies and other investments are expected to boost the top-line growth of the business.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~14.03% in the past six months. Currently, the stock is trading below the average of its 52-week’s high and low levels of $2.32 and $1.145, respectively. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium as compared to its peer average, considering its synergies from acquisition, decent liquidity position, enhancing shareholder’s value, increase in top line in 1HFY21 and an encouraging outlook. For that purpose, we have considered peers such as Nitro Software Ltd (ASX: NTO), 99 Technology Ltd (ASX: 99L), to name a few. Considering the increase in revenues in 1HFY21, decent liquidity position, positive long-term outlook, synergies from buyout, current trading levels, and valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $1.685 (as on June 18, 2021, 6.35 AM (GMT+10), Sydney, Eastern Australia).

CL1 Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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