Company Overview: ReadyTech Holdings Limited is an Australia-based company, which is focused on developing education software. Its segments include Education segment and Employment segment. It offers a range of products for Education, such as JR Plus, VETtrak, A2E and My Profiling. Its products for Employment includes HR3, Aussiepay and ePayroll. Its products for Pathways includes JR Live, JR Active, JR Gov and Esher House. JR Live platform for job active and DES programs enabling caseworkers to match job seekers with vacancies, manage work placements, provide post-placement support (PPS) and track job outcomes. JR Active platform is integrated with Government systems and helps support career advice, administer training contracts and incentives to employers, monitor apprentices and provide business intelligence tools to inform decision making. VETtrak software offers short message service (SMS) for small to medium-sized private VET providers.
 

RDY Details

Strong Revenue Growth across both Business Segments: ReadyTech Holdings Limited (ASX: RDY) is a SaaS technology provider to the education and employment sector. The company provides people management software in areas of student management, apprenticeship management, employment services, etc., to a large base of educators, employers and work transition facilitators. During the financial year ended 30^th June 2019, the company performed excellently and surpassed the financial guidance provided in the prospectus. During the year, pro forma revenue went up by 13.5% and stood 1% ahead of the prospectus forecast. Pro forma EBITDA and NPATA also exceeded the prospectus forecasts, boosting the confidence in the guidance provided for the calendar year 2019.

During the year, the company continued to deliver on its growth strategy which aims at securing high value customers and adding value for existing customers. In order to pursue the above objectives, the company is continuously engaged in incorporating new and innovative technologies in the education and employment segments, that in turn, enhances business value. During the year, the company has spent a substantial amount on research & development to offer greater value to customers. For instance, in the education segment, the company has been targeting high-value tertiary education providers, including TAFEs and higher education customers. The business demonstrated success in the above segment with the contract signed with the University of Queensland and is eyeing more such contracts through a strong pipeline of interest. In the employment segment, the company is well known for its payroll and HR admin systems and has received a positive response from large business customers in both the markets. By continuously adding new and valuable offerings for the existing customers, in the form of student services, online enrolment, student engagement tools, onboarding solutions, workplace health and safety, etc., the company aims at increasing the spend per customer to drive the financial value of the business. Another factor adding to RDY’s growth involves the cross-sell opportunities that arise from its complementary technology offerings. Currently, the company offers certain tools which are useful for over 10% of its education customer base.

During 1HFY20, the company continued its growth trajectory and successfully delivered on its business objectives of securing high-value customers in both the segments, along with added value for the existing customers. During the half, the company secured new contracts from few high-value customers and delivered a decent uplift in key financial metrics. Moreover, the company delivered on its financial guidance for the calendar year 2019. The company continued to improve its earnings generation capabilities and reported a double-digit growth in EBITDA for the first-half. Cash flow from operating activities in the first half amounted to $7.1 million, representing a conversion of 86% as a percentage of EBITDA. From 1HFY18 to 1HFY20, both cash flow and conversion rate have grown substantially, as depicted in the figure below. As a result, the company has strengthened its financial position to pursue its growth objectives.


Cash Flow (Source: Company Reports)

Going forward, the company will focus on boosting customer confidence by enhancing its functions and aims to build a network of sticky customers. Long lasting customers on the platform will further promote its offerings in the market, naturally leading to growth in business and revenue. The company foresees numerous opportunities with the changing nature of the education and employment sectors and is focused on being up to date through a forward-thinking approach, to grab opportunities as and when they arise.

Financial Results for the Half-Year Ended 31^st December 2019: During the six months period, the company continued to deliver on its growth strategy, that resulted in pro forma revenue amounting to $19.2 million, representing an increase of 19.9% on the previous year. Growth in revenue came in as a result of new contract wins and more business across the existing customer base. Underlying EBITDA for the period came in at $8.3 million, up 35.9% on the prior corresponding period. Underlying net profit after acquisition amortisation came in at $4.3 million, representing a substantial increase of 73.8% on the prior corresponding half. Average revenue per client came in at $9.6k, up 8% on pcp. Revenue for the education segment came in at $10.7 million, representing an increase of 11% on the prior corresponding period. EBITDA for the segment stood at $4.8 million, representing a growth rate of 30% on pcp. The Employment segment reported revenue amounting to $8.5 million, up 35% on the prior corresponding period. EBITDA, including acquisitions, stood at $4.1 million, up by $0.9 million on the prior corresponding period.


1HFY20 Financial Summary (Source: Company Reports)

Operational Highlights: During the half, the company secured a contract with Bendigo TAFE and Kangan Institute in Victoria, for its flagship student management system, JR Plus. As a part of the contract, the company will provide an initial five-year software subscription to the institute for a consideration of $7 million. Sale of newly developed products to existing customers has also gained momentum, with multiple cross-sell opportunities leading to new contract wins. For instance, the company has a strong demand for its student profiling application, My Profiling, that opens doors for business expansion. The first half also saw the complementary strategic acquisitions of two workforce management and payroll software and services businesses. Zambion and Wagelink, the business acquired, added new technologies on the platform and provided new customer opportunities in the New Zealand and South Australian markets. Integration of both the businesses into RDY’s platform is strengthening its foothold in the employment domain and offers cross-platform choice of technologies for a variety of businesses.

During the first half, the company continued to invest in research & development for the improvement of products and new modules, in the form of student services development, student engagement, new workflow automation, self-service, onboarding upgrades, etc., that provided enhanced customer value. The company reported higher customer satisfaction rates, with a client revenue retention rate of 95%.

The newly acquired businesses, Zambion and Wagelink, come with significant sales opportunities. In addition, the company has also notified about a new offering, HR3, that is expected to drive future sales across the employment segment. Moreover, the company will begin realising revenue from the newly signed contract with the Bendigo TAFE and Kangan Institute in Q4FY20.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 42.91% of the total shareholding. Pemba Capital Partners Pty Ltd held the maximum number of shares with a percentage holding of 21.59%, followed by Microequities Asset Management Pty Ltd. holding 5.99%.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: For the half year ended 31^st December 2019, RDY reported gross margin and EBITDA margin of 94% and 41.2%, which is higher than the industry median of 84.1% and 26.6%, respectively, implying decent fundamentals of the company. Net margin of the company stood at 10.6%. Debt to Equity multiple stood at 0.95x, as compared to a multiple of 2.51x in the prior corresponding half. At the end of the period, net debt stood at $20.4 million, with net debt to CY19 pro forma EBITDA multiple of 1.4x. Going forward, the company will see a continued contribution from the businesses acquired which will further add to earnings and improve financial leverage. 


Key Metrics (Source: Thomson Reuters)

Outlook: Moving forward, the company seems to be well-positioned to serve its customers with the best possible solutions and has laid a strong foundation for future growth in the form of new client wins, acquisitions, product enhancements and talent retention. In addition to retaining the existing talent in the organisation, the company is continuously focused on attracting new talent through the creation of new roles to support its growth strategy. The Australian tertiary education and training industry represents significant growth prospects with substantial reliance on technologies, depicted by information and technology expenditure of $1.85 billion in 2020. In FY20, the company expects revenue to grow at a rate of ~20%, with an organic revenue growth rate in the early double-digits. Underlying EBITDA margin for the period is expected to come in at around 40%.


Key Valuation Metrics (Source: Thomson Reuters)
 
Valuation Methodology: EV/EBITDA Multiple Approach

EV/EBITDA Based Valuation (Source: 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 generated positive returns of 13.50% and 8.82% over a period of 3 months and 6 months, respectively. Currently, the stock is trading below the average of its 52-week trading range of $1.400 - $2.290. During the first half, the company experienced increased client spend in the employment segment due to employee growth and additional module uptake. Moreover, the company continued to invest in its growth objectives to drive sales and boost customer retention. The education segment remained on track with average spend of education client wins being 3.4 times more than the average churned customers. Overall, the business reported a strong half and expects new client wins, acquisitions, a loyal customer base, along with several product enhancements, to shape its performance in FY20 and beyond. We have valued the stock using EV/EBITDA based relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). Considering the performance in FY19, followed by a strong first half, anticipated benefits from integration of new businesses and new client wins, decent revenue guidance for FY20, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.705, down 7.838% on 28^th February 2020.

 
RDY Daily Technical Chart (Source: Thomson Reuters)

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