Company Overview: ELMO Software Limited (ASX: ELO) is engaged in offering cloud-based HR, payroll, expense management solutions, to mid-market enterprises and small businesses. The company operates on a Software as a Service (“SaaS”) business model based on recurrent subscription revenues and has its offices in Australia, New Zealand, and the UK.

ELO Details

A Quick Look at 1QFY22 Key Aspects: In FY21, the company completed two significant acquisitions, namely, Breathe and Webexpenses, which aid ELO to expand its market opportunity and propel its growth strategy. The company witnessed robust growth reverting throughout 2HFY21 from the mid-market and in the Breathe segment. The company also bought Vocam, BoxSuite, and HROnboard. These acquisitions lay a strong foundation for long-term and sustainable growth for the company. 

• Robust ARR Growth: The company reported a 61% increase in its Annualized Recurring Revenue (ARR) to a record $88.5 million in 1QFY22, and its organic ARR growth of 35% on pcp.
• Increase in Revenues and Cash Receipts: Revenue stood at $20.7 million in 1QFY22, an increase of 52% on pcp. In 1QFY22, cash receipts stood at $27.7 million, up 78% on a year-over year-basis, aiding the company to achieve its goal and organic growth initiatives.
• Growth in Small Business Segment: The acquisition of Breathe, led to growth of 55% in ARR under the small business segment through the past 12 months. The growth was led by onboarding of new customers and cross-sell of new modules introduced since acquisition.
• Mid-Market Expansion: ELO’s mid-market ARR business continued to grow sharply by 43% year over year to $78.4 million in 1QFY22. Mid-market organic growth through the last 12 months stood at 28%, depicting continued acceleration in ARR and the return towards pre-COVID-19 growth rates.  
• Robust Adoption of New Module: In 1QFY22, the company introduced two new modules namely, Experiences and COVIDsecure, and is expecting an uptake in the days ahead. Experiences boost employee engagement, whereas COVIDsecure module assists businesses to reopen safely, by recording, monitoring, and reporting on their employees’ COVID-19 vaccination and test status.
• Liquidity Position: The company exited 1QFY22 with a cash balance amounting to $75.7 million. 

ARR Highlights (Source: Company Reports)

Delve Into FY21 Key Aspects:

• The FY21 ARR amounted to $83.8 million, up by 52.1% Y-o-Y, due to a rise in remote working, adoption of cloud-based HR technology, and recovery in business confidence.
• Revenue stood at $69.1 million in FY21, an increase of 38.1%, where over 96% of revenue was subscription-based, which is recurrent in nature. In FY21, customer retention came in at 95.7%, depicting the strength of the company’s loyal customer base, which enhances its cross-sell potential.
• ELO’s Total Addressable Market (TAM) increased to A$12.8 billion across Australia, New Zealand, and the United Kingdom in FY21.
• ELO’s mid-market business continued to grow sharply by 85.1% year over year to 3,114 customers in FY21.
• The company exited FY21 with a cash balance amounting to $81.9 million. The company’s total debt at the end of the period stood at ~$54 million. Operating cash inflows slightly improved in FY21 to ~$6.10 million as compared to $6.07 million in PcP.

Key Metrics:  In FY21, the company’s cash cycle days stood at 67.9 days compared to FY20 cash cycle days of 78.8.

Liquidity Profile; Analysis by Kalkine Group  

Key Recent Update: On 23 November 2021, the company informed the market that it has received consent from the Australian Securities and Investments Commission (ASIC) to change its auditor, effective immediately. In this regard ELO appointed, Grant Thornton Audit Pty Ltd (Grant Thornton) as the company’s new auditor.

Top 10 Shareholders: The top 10 shareholders together form around 57.93% 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 15.18%. Immersion Capital LLP is the second-largest shareholder, with a holding of 14.85%, as also highlighted in the chart below:

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:  The company faces competition from industry peers, technological changes, and integration risks from various acquisitions. ELO also faces regulatory changes while expanding in new markets of APAC and the UK. ELO’s net loss is increasing on a year-over-year basis. Hence, these mounting losses may throw tough challenges at the company’s overall functioning and may drain liquidity from the balance sheet.

Outlook: The company is bouncing back and increasing confidence in its business, owing to higher adoption of cloud-based business tools, including HR technology as people are remotely working from home, given the current global scenario. FY22 is smoothing up to be a good year for the company, across both mid-market and small business segments penetration in Australia, the UK, and New Zealand. For FY22, the company expects annualised recurring revenue to be between $105 - $111 million, representing 25% to 33% YoY growth. Revenues for the same period are expected to be in the range of $90.5 - $95.5 million, depicting a rise of 31% to 38% on pcp. EBITDA for FY22 is expected to be between $1.0 - $6.0 million.

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: In the past year, the stock went down by ~25.16%. The stock just recovered from its 52-week low price of $4.20. The stock has been valued 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). The company might trade at a slight premium to its peers, considering decent liquidity position, high customer retention rates, increase in top-line, the turnaround in EBITDA numbers, and an encouraging outlook, etc. For the purpose of valuation, few peers like Nearmap Ltd (ASX: NEA), Bigtincan Holdings Ltd (ASX: BTH), Nitro Software Ltd (ASX: NTO), and others have been considered. Considering the robust management focus toward growth, new module adoption, growth in ARR, recovery in mid-market segment & small business (Breathe) in 2HFY21, synergies from acquisitions, geographical diversification, positive long-term outlook, current trading level, indicative upside in the valuation, and key risks associated the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $4.76, as on 3 December 2021, 10:45 AM (GMT+10), Sydney, Eastern Australia.

ELO Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

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.

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.

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