MENU

Are Class Ltd (ASX:CL1) shares cheap?

The share price of financial software services provider Class Ltd (ASX: CL1) has fallen 19% in FY19 because of a slowdown in new account wins in the SMSF software market. The company’s performance over the last 12 months has also lagged other fintech growth stocks such as Praemium Ltd (ASX: PPS) and Hub24 Ltd (ASX: HUB).

In FY18, Class saw operating revenue grow by 18% to $34.0 million with diluted earnings per share up 9% to 7.3 cents. The increase in revenue was not matched in the bottom line due to a fall in profit margins. The jump in revenue was fueled by the 25,469 new accounts Class won in SMSF and Portfolio in FY18, with the company’s market share in the SMSF software market climbing from 24% to 27%.

After a brief rally following the release of its full-year earnings, Class’ share price has resumed its fall. Currently trading for $1.95 the stock trades at levels not seen since March 2016. Consensus estimates for FY19 earnings are currently 7.70 cents per share, which prices Class on a forward valuation multiple of 25.

A flat second half

Despite record account growth in the December and March quarters, the June quarter was weak as competition in the market intensified. Revenue was flat in the second half when compared to the first half.

Of particular note was the decline in average revenue per user (ARPU) from $216 to $215 in Class Super and from $147 to $139 in the smaller Class Portfolio. Customer acquisition costs (CAC), which measure sales, marketing and implementation expenditure divided by gross new accounts won over a rolling 12 month basis also rose from $114 to $144.

Foolish takeaway

Class is a high quality business operating in a niche market. I think there is a reasonably good chance that the company can become the market leader in the SMSF software space and surpass the incumbent BGL.

The company’s recurring revenues are sticky with a customer retention rate of 99.5% in FY18, although this excludes the ~2,700 accounts AMP Limited (ASX:AMP) moved off the platform during the year.

At 25 times forward earnings, shares of Class are cheaper than they have traded for in recent times. However, the reduction of its premium valuation multiple is justified by the slowing growth rate of new accounts added and a flat second half as the market adjusts its expectations moving forward.

Furthermore, possible legislative changes regarding the refunding of imputation credits and its ramifications on the SMSF industry is another issue for investors to keep in mind.

With all that in mind, I’m on the sidelines for now and will wait for the September quarter update before reevaluating the company.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Atlassian.

We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. 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 Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.