The Class Ltd (ASX: CL1) share price has been on a rollercoaster over the past few months. It reached a high of $3.56, fell down to $2.33 after a disappointing update and has since recovered to $2.80.
Class is a cloud accounting software provider for self-managed superannuation fund (SMSF) administrators. Its tools and automation allow the work to be done efficiently and perhaps quite profitability by accountants.
There has been a growing trend of SMSF portfolios transitioned onto Class' software. Here's why Class profits could keep growing strongly:
Accountants still plan to move to the cloud
It's hard to deny how much better Class' software is compared to other desktop providers.
Class regularly surveys accountants to see how many plan on changing to cloud accounting from their old software. According to Class Digital Trends Survey during the fourth quarter of 2016, 43% of SMSF accountants and administrators were considering moving to cloud software over the next two years.
There has been recent regulatory uncertainty regarding reporting rules for SMSFs. Class believes this is the main reason why growth rates have slowed over the last couple of quarters. Class management believe growth will pick up again now that the rules have been decided.
Growing margins
One of the main things I like to see from a growing business is that its profit margins are increasing, this means more revenue should fall to the bottom line as profit.
In FY17 the net profit after tax (NPAT) margin grew from 25.8% to 27.6% and the earnings before interest, tax, depreciation and amortisation (EBITDA) margin increased from 44.5% to 48.4%.
If Class can keep increasing its margins it should prove to be very effective at growing earnings per share (EPS) and the share price.
Class Portfolio
Class has a new product which is aimed at non-SMSF portfolios. Management believe the opportunity for this product could be as big as Class SMSF.
In the quarterly update for September 2017 Class revealed that Class Portfolio grew by 12% to 3,631 accounts.
Foolish takeaway
Class is trading at 35x FY18's estimated earnings with a grossed-up dividend yield of 2.55%. This isn't cheap, but I think Class could grow strongly over the next two to three years, making today's price good value.
