Company Overview: ELMO Software Limited (ASX: ELO) is engaged in providing innovative cloud HR, payroll, and rostering/time and attendance know-how. Established in 2002, it 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 to Gain from Robust SaaS-Based Solutions & Synergies from Buyout: ELMO Software Limited (ASX: ELO) is an HR technology company that provides innovative cloud HR, payroll and rostering/time and attendance technology. ELO is betting big on small and medium business to turnaround its business. The company remains on track to acquire other companies to strengthen its position as a leading cloud, Software-as-a-Service, HR, and payroll provider in Australia and New Zealand. The company remains on track to widen its all-in-one solution, offering new modules to its latest and existing customers. These new modules are the source of additional revenue streams, which, in turn, increases its competitive position in the market. In 1HFY21, the company added expense management module to the suite via the acquisition of Webexpenses, offering a significant cross-sell prospect.

Coming to the 1HFY21 key numbers, the company’s 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. Statutory EBITDA loss came in at $0.8 million. In addition to the decent 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. The company’s mid-market business remained strong, 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.

ARR Highlights (Source: Company Reports)

By motivating key customers to subscribe to additional modules, the company remains on track to increase usage of its solutions amongst the existing customer base. In doing so, the company intends to invest higher in sales and marketing and expand its human resources software offering. It also aims to broaden its mid-market market penetration in Australia, the UK, and New Zealand. Moreover, the company remains committed to invest in research and development with the total spend amounting to 46.5% of statutory revenue in 1HFY21, as compared to 44.9% in 1HFY20.

Acquisition Spree: On 7 October 2020, the company acquired 100% of shares in Breathe, a high growth UK based HR platform designed for Small Business. ELMO’s Total Addressable Market (TAM) increased to A$12.8 billion across Australia, New Zealand, and the United Kingdom. The Breathe’s buyout in the UK is an essential milestone in ELO’s development. Breathe will be introduced into the Australian market in the second half of FY21, thus leveraging ELO’s infrastructure and expertise. On 16 December 2020, the company bought 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. In 2019, the company also bought Vocam and completed the acquisition of HROnboard. Another acquisition in January 2019 was of BoxSuite. These acquisitions lay a strong foundation for long-term and sustainable growth for the company.

Acquisition Synergies (Source: Company Reports) 

Top 10 Shareholders: The top 10 shareholders together form around 58.53% 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 LLP 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  

Key Metrics, Healthy Balance Sheet and Decent Liquidity: The company has 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. 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.

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

Risk Analysis: The company is exposed to credit risk, liquidity risk and market risk, arising from financial assets and liabilities. Additionally, the risk of changes in foreign exchange rates along with COVID-19 led disruptions remains a potential headwind. Additionally, stiff competition in the markets where ELO operates and regulatory concerns may hamper the financial performance. 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.

Outlook:  ELO expects a decent growth in ARR and revenue in FY21. 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. 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 service 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.

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: 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. Over the last three months, the stock went down by ~22.36%. The stock made a 52-week low and high of $4.7 and $8.06, respectively, and is currently trading below the average of its 52-week trading range. 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 average, considering decent top-line performance, heathy balance sheet, high customer retention rates, focus on delivering organic growth, and encouraging outlook. We have taken peers like Nearmap Ltd (ASX: NEA), Nitro Software Ltd (ASX: NTO), to name a few. Considering the above-mentioned factors, focus on delivering organic growth supplemented with strategic acquisitions, 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 $5.50, down by ~2.136% on 23 April 2021.  

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

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