The Class Ltd (ASX: CL1) share price has grown by 6.3% since its report earlier this week. Now the dust has settled, is it a buy?
Class is the creator of accounting software for self-managed superannuation fund (SMSF) administrators. A key selling point for Class is that its program is a cloud solution.
Class released its FY17 annual report earlier this week, here are a few of the numbers compared to FY16 (after adjusting for the IPO costs in FY16):
- Operating revenue up 28%
- Earnings before interest, tax, depreciation and amortisation up 39%
- Net profit after tax up 37%
- Earnings per share up 31%
- Dividend up 34%
- Net profit after tax margin up from 25.8% to 27.6%
- Class super accounts up 27% to 140,690
I think every business on the ASX would be happy with those numbers.
Technology businesses usually have great margins. Once the software has been developed it can be rapidly rolled out to many customers. It's not like a furniture company that for each chair it sells it has to pay for the materials and labour to make it, pay for shipping and pay for storage in a warehouse or shop.
It's very pleasing to see Class' margins continue to grow. This means that for each additional customer it has, more revenue will fall to the bottom line.
New government regulations mean that cloud accounting is almost a must-have for SMSFs. This should be great for Class over the next year or two, however it will also likely mean competitors have to raise their game.
Negatives
There were two negatives that I saw from the report.
The first was that the retention rate dropped from 99.8% to 99.4%. This is still exceptionally high but hopefully the downward trend doesn't continue.
The other negative was that the average revenue per unit (APRU) declined from $218 to $216. Hopefully this just means Class was picking up smaller clients which produce lower revenue. It would be somewhat worrying if it was Class having to slightly lower prices to retain or win portfolios.
Should you buy?
Class is currently trading at 45x FY17's earnings with a grossed-up dividend yield of 2.36%. This is still a high price/earnings ratio, but it may be warranted with the potential growth.
I don't think the current price of $3.03 leaves much margin for error in the short-term, though it should be a pretty good price for the long-term. I have a feeling the Class share price may decline a bit when the AMP Limited (ASX: AMP) portfolios leave, this could be the perfect time to buy if the price declines.
