Company Overview: ELMO Software Limited (ASX: ELO) is an HR technology company that offers pioneering cloud HR, payroll, and rostering/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 524 employees as at 31 December 2020, with offices in Australia, New Zealand, and the UK. In the same time span, the company has a customer base of ~10,038 organisations, up from ~1,682 as on 30 June 2020.

ELO Details

ELO Rides on Acquisition Synergies and Decent Liquidity Position: ELMO Software Limited (ASX: ELO) is an HR technology company that provides innovative cloud HR, payroll and rostering/time and attendance technology. 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 is well equipped to offer uninterrupted service to its customers. The company remains on track to broaden its all-in-one solution, thereby providing its new and existing customers with the latest modules. These new modules garner further revenue streams and enhance the company’s competitive advantage against its peers.

In the second half of FY21, the company added an expense management module to its product suite via Webexpenses acquisition, thus offering a substantial cross-sell opportunity. On 16 December 2020, the company acquired Webexpenses, a high growth, cloud-based expense management solution company. The move is in-line with ELO’s strategies to enhance its technology know-how, increase its customer base, and accelerates ELMO’s mid-market expansion in the UK. As a result of the buyout, ELMO’s Total Addressable Market (TAM) increased to A$12.8 billion across Australia, New Zealand and the United Kingdom. On 7 October 2020, the company acquired 100% of shares in Breathe, a high-growth UK based HR platform designed for Small Businesses. The Breathe’s buyout in the UK is an essential milestone in ELO’s development. Breathe’s scalable platforms increase ELMO’s Total Addressable Market (TAM) by A$2.2 billion and provides a deeper footprint in the United Kingdom, Australia, and New Zealand. The acquisition also expands ELMO’s UK footprint with more than 7,000 customers in that market.

In February 2019, the company bought Vocam that 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 offering. 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 Reports)

Sneak Peek at 1HFY21’s Key Results: In 1HFY21, the company’s record annualised recurring revenue soared 42.8% on a year over year basis and came in at $74.2 million. Of this, more than 97% of the revenue was subscription-based. The company continues 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. The company’s mid-market business remained healthy with 2,892 customers in 1HFY21, up 95.7% year over year. In 1HFY21, customer retention came in at 90%, depicting the strength of the company’s loyal customer base, which enhances its cross-sell potential. Statutory revenue increased by 29.3% year over year and came in at $30.6 million. Gross profit margin stood at 88.5%, up 3.9% on 1HFY20, owing to higher investment in client services to support an increased and growing customer base. Statutory EBITDA loss came in at $0.8 million. 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.

Key Highlights (Source: Company Reports) 

Healthy Balance Sheet and Decent Liquidity: For 1HFY21, the company reported a gross margin of 85.4%, higher than the industry median of 79.7%. In 1HFY21, the company’s cash cycle days stood at 59.6 days as compared to 1HFY20 cash cycle days of 71.3. The company has also built a decent balance sheet position with total assets reaching $290.7 million as at 31 December 2020, up from $164.9 million as at 31 December 2019. ELO has cash and cash equivalents of $71.3 million. Total debt at the end of the period amounted to ~$18.7 million. Net cash from operating activities came in at $2.99 million for the period ended 31 December 2020. The period also saw record cash receipts, amounting to $34.4 million, up 25.5% on year over year basis. Capital raising is likely to help the company to achieve its goal and organic growth initiatives. The company’s healthy balance sheet and skilled management team along with its long-term nature of customer relationships place the company for considerable long-term growth.

Growth and Profitability Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 57.96% of the total shareholdings while the Top 4 constitutes the maximum holding. Jlab Investments (No. 2) Pty. Ltd. is the entity, holding maximum shares in the company at 15.31%. Immersion Capital Master Fund Ltd. is the second-largest shareholder, with a holding of 14.98%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group  

Risk Analysis: ELO continues to acquire a large number of companies, which adds to integration risks. It can also adversely impact its balance sheet in the form of an elevated level of goodwill and intangible assets. Moreover, stiff competition in the markets where ELO operates, COVID-19 led disruptions, and regulatory concerns may dampen financial performance. Further, foreign currency fluctuation risks and government restrictions add to the woes. The company is exposed to credit risk, liquidity risk and market risk, arising from financial assets and liabilities.

Outlook: The company’s business has proven to be resilient to the impacts of COVID-19, owing to strong record levels of cash receipts and enhanced market opportunity for its convergent solution. Going forward, the company expects positive results to continue in FY21. ELO also intends to increase investments in numerous key growth pillars of its business to drive further opportunities in FY21 and beyond.  Going forward, it seeks to execute on a strategy to increase customer share in the lower mid-market organisations that have limited HR solution options. The company seems well-capitalised to continue investing in both organic growth and strategic acquisitions. The company has revised its outlook for FY21 in an upward direction. ELO now expects its FY21 ARR to be in the range of $81.5 million and $88.5 million. Further, the company now expects FY21 revenue to be between $65 million and $71 million. Further, it remains strong with a robust long-term sales pipeline, including significant opportunities to attract new customers across key markets and increased technology spend amongst existing customers.

Group ARR Growth (Source: Company Reports)

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

Data Source: Refinitiv, Thomson Reuters, 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: Over the last three months, the stock went down by ~19.4%. The stock made a 52-week low and high of $3.66 and $8.06, respectively, and is currently trading below the average of its 52-week trading range. On the technical analysis front, the stock has a support level of ~$4.798 and a resistance level of ~$6.177. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at a slight premium to its peer median, considering its strong 1HFY21, decent top-line performance, high customer retention rates, focus on delivering organic growth, decent cash position and encouraging outlook. We have taken peers like Nearmap Ltd (ASX: NEA), Nitro Software Ltd (ASX: NTO), to name a few. Considering the above factors, acquisition synergies, decent 1HFY21 financial performance, increasing gross margins, and positive long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $5.20, down by 0.192% on 26 February 2021.  

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

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