Company Overview: ELMO Software Limited (ASX: ELO) is an HR technology company that offers pioneering cloud HR, payroll solutions, creating roasters, time, and attendance technology. The company was established in 2002 and operates on a Software as a Service (“SaaS”) business model based on recurrent subscription revenues. The company has approximately 384 employees as at 30 June 2020, with offices in Australia, New Zealand, and the UK. In the same time span, the company has a customer base of ~1,682 organisations.

ELO Details

Robust Business Model & Synergies from Buyout Remain Key Catalysts: ELMO Software Limited (ASX: ELO) is an HR technology company that provides innovative cloud HR, payroll and rostering/time and attendance technology. As at 30 June 2020, the company had key offices in Sydney, Melbourne, Perth, Brisbane, Auckland and Christchurch region with a headcount growing to 384. The company recently reported cash receipts of $61.1 million, for a period of 12-months, soaring 30.4% on a year over year basis. In 1QFY21, cash receipts came in at $15.6 million, depicting a rise of 29.8% on a year over year basis. As at 30 September 2020, the company’s cash balance stood at $130.4 million with no debt. 

At the beginning of October 2020, the company acquired 100% of shares in Breathe, a high growth UK based HR platform designed for Small Business. Post the buyout of Breathe, the company’s total addressable market increased to ~$11.4 billion. The Breathe’s buyout in the UK is an essential milestone in ELO’s development. The acquisition will provide a deeper footprint in the United Kingdom, Australia, and New Zealand. The acquisition also expands ELO’s UK footprint to more than 6,700 customers.

Breathe Acquisition (Source: Company Reports)

In FY20, the company laid a long-term, sustainable foundation to achieve its growth impetus and continued momentum, despite some of the macroeconomic hindrance in the broader economy. The enhanced product suite provides the company with a competitive edge, increased potential of sales to new customers and additional cross-sell opportunities from existing customers. In FY20, the company’s annualised recurring revenue increased by 19.7% on pcp, out of which more than 97.6% of the revenue was subscription-based. Gross profit margin went up from 1.3% reported in FY19 to 85.3% in FY20, owing to higher investment in client services to support an increased and growing customer base. In FY20, customer retention came in at 90.2%, depicting the strength of the company’s loyal customer base, which enhances its cross-sell potential. Statutory revenue increased by 25% year over year and came in at $50.1 million.

FY20 Statutory and ARR Highlights (Source: Company Reports)

ELO expects a decent growth in ARR and revenue in FY21. The company’s cloud-based platform is also engaged in developing and maintaining key growth strategies remotely during the coronavirus led pandemic. This indicates that the company remains well-equipped to offer uninterrupted services to its customers. In addition to the robust financial performance, ELO also invested significantly during the year to enhance its technological capabilities, sales & marketing resources, and expansion of product suite to promote long-term, sustainable growth for the business.

InOrganic Growth Strategy: In February this year, the company bought Vocam, which aided the company to expand its total addressable market, with the inclusion of UK opportunities. In January 2019, the company completed the acquisition of HROnboard, which provided a boost to its customer base in the human capital management (HCM) space and offered good scope to cross-sell its extensive SaaS offerings. Another acquisition in January 2019 was of BoxSuite. These acquisitions lay a strong foundation for long-term, sustainable growth for the company.

Acquisitions Highlights (Source: Company Profile)

Enhanced Business Model: The company’s cloud HR, payroll and software solutions and business model have been mainly developed to address the HCM requirements of organisations ranging from 50-2,000 employees. During FY20, ELO’s modular product offering improved to 15. Moreover, the market is differentiated by legacy providers. ELO opines a large underserviced market has emerged, which needs to embrace an effective and accessible cloud solution. This is where ELO comes into the picture, as it offers these organisations more flexible and cost-effective HR, payroll and & attendance solutions with shorter sales cycles, and easier execution processes. ELO is well-positioned to take benefit from the prospects by having the broadest convergent cloud-based platform in the region.

Decent Balance Sheet: As at 30 June 2020. ELO’s total assets reached $246.3 million, depicting a healthy balance sheet position. ELO has cash and cash equivalents of $139.9 million, as compared to $27.7 million reported at the end of June 2019, reflecting the cash generative nature of ELO’s business. The main reason for the rise in the cash balance through FY20 was the capital raise in September 2019 and May 2020. The company strengthened its cash resources during FY20 via two oversubscribed capital raises. In September 2019, the company raised $70 million through an equity placement, and in May 2020, the company raised an additional $72.8 million. Total debt at the end of the period amounted to ~$18.7 million. Net cash from operating activities came in at $6.4 million for the period ended 30 June 2020.

Cash Balance Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 58.22% of the total shareholding. Jlab Investments (No. 2) Pty. Ltd. is the entity, holding maximum shares in the company at 15.80%. Immersion Capital Master Fund Ltd. is the second-largest shareholder, with a holding of 14.01%.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In FY20, the company had a current ratio of 3.10x, higher than the industry median of 1.96x, representing a decent liquidity position. For FY20, the company reported gross margin of 84.1%, which is higher than the industry median of 80.8%. Debt to Equity ratio for the same time span stood at 0.10x, lower than FY19 ratio of 0.22x. The company is optimistic about business growth, considering the synergies from acquisitions and lower debt levels.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company is exposed to credit risk, liquidity risk and market risk, arising from financial assets and liabilities. Additionally, fluctuation in foreign exchange rates along with COVID-19 led disruptions remain the potential headwinds. Additionally, stiff competition in the markets where ELO operates and regulatory concerns may hamper financial performance.

What to Expect: The company has upgraded its FY21 outlook, post the acquisition of Breathe. ELO now expects its FY21 ARR to be in the range of $72.5 million and $78.5 million (previous guidance was $65 million and $70 million). Further, the company now expects FY21 revenue to be between $61 million and $66 million (previously $57 million and $61 million). Further, capital raising is likely to help the company to achieve its organic growth initiatives. The company also remains on track to continue its scale of operations, with an enhanced focus on research and development. These initiatives are likely to position ELO as a leading cloud, Software-as-a-Service, HR, and payroll provider in Australia and New Zealand.

FY21 Outlook (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company went up ~12.2% in the past one month and is currently trading below the average of its 52-week low and high level of $3.66 and $8.39, respectively. On the technical analysis front, the stock has a support level of ~$5.345 and an immediate resistance level of ~$5.963. ELO remains focused on delivering organic growth supplemented with strategic acquisitions. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method. For the said purpose, we have considered peers like Integrated Research Ltd (ASX: IRI), LiveTiles Ltd (ASX: LVT), Nitro Software Ltd (ASX: NTO), to name a few. As a result, we have arrived at a target price with an upside of low double-digit (in percentage terms). Considering the above-mentioned factors, we give a “Buy” recommendation on the stock at the current market price of $5.80, down 1.193% on 6 November 2020.

ELO Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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