Will Countplus Ltd surprise to the upside this earnings season?

Credit: GotCredit

Accounting and financial services aggregator, Countplus Ltd (ASX: CUP) continues to slump to new all-time lows amidst market volatility. With management slated to report earnings on 26 February, now might be the time to buy in to this well managed company to benefit from its investment in Class Limited (ASX: CL1).

Class investment

Class Limited listed on the stock exchange at $1 per share on 16 December last year. It was an IPO 10 years in the making and was co-founded by Barry Lambert. Lambert is the current Chairman of Class Limited and has a proven performance record with former ventures Count Limited and Countplus (in both of which he was also chariman).

About Class Limited

Class Limited is a disruptor of accounting services, being the leading cloud-based SMSF administration software provider in Australia. Class Limited owns Class Super, a platform which allows accountants, administrators and advisors to easily manage and audit SMSFs. This is a sector with very little competition with only two other private providers currently operating in the cloud-based space.

As at 31 December 2015, Class Limited had a total of 96,637 billable portfolios roughly accounting for 16.7% of total SMSFs in Australia. With the entire Countplus Group adopting Class Super as its preferred SMSF software and companies like Deloitte, Macquarie Group Ltd (ASX: MQG) National Australia Bank Limited (ASX: NAB) and Westpac Banking Corporation Limited (ASX: WBC) using some of its software services, Class Limited should continue to grow solidly into the future.

Countplus stake

Countplus is the largest institutional shareholder in Class Limited and is the reason why Countplus should benefit from Class Limited’s success. The group currently owns 5.04% of the company (or 5,882,540 shares), valuing the stake at $11.24 million based on yesterday’s closing price of $1.91. Notably, Countplus’ investment in Class Limited was made before it listed. This means its annual report issued in September last year, which valued the investment in Class Limited at $3.64 million, was not “marked-to-market”. Accordingly, when Countplus reports later this month, it should reveal a pleasant surprise for long-term investors with a circa $7.5 million revaluation in its investments.

Existing business

The kicker for Countplus is that investors are effectively getting the existing business for a discount on last year’s value because of its successful investment in Class Limited. This means its share price should have increased as Class Limited grew in value (all else being equal), but instead, has gone backwards since Class Limited listed.

2015 earnings

In 2015, Countplus reported earnings of $9.93 million, which were materially down from 2014 due to the cessation of loyalty payments from majority shareholder, Commonwealth Bank of Australia (ASX: CBA). Earnings per share came in at 9 cents and the company paid a fully-franked dividend of 8 cents.

Steady outlook

At its Annual General Meeting in November, management provided a market update for 2016 indicating that revenue from accounting and tax services is down 1% year-on-year. However, strong growth in its property services division – Pacific East Coast – and continued success in its financial planning firms sees management expecting full year earnings to be in-line with 2015 results, implying steady momentum across the business.

Dividend yield

Additionally, Countplus has a proud history of paying a quarterly, fully-franked dividend. Even if earnings remain flat at 9 cents per share as indicated by management, Countplus should be able to maintain its annual 8 cents dividend (2 cents per quarter), implying a gross yield of 13.7%.

Foolish takeaway

Countplus’ aggregator business is very solid on its own. However, with its large investment in Class Limited yet to be marked-to-market, it is likely that investors will receive a positive surprise when it reports this earnings season which could see a re-rating of its shares.

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Motley Fool contributor Rachit Dudhwala owns shares of Countplus Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Class Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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