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Why the Reckon share price is flat on underlying NPAT up 3%

Reckon Limited (ASX: RKN) put a difficult 2018 behind it to a post a solid result in its full-year earnings (FY18) this morning.

The company increased its underlying net profit after tax (NPAT) by 3% YoY to $8.8 million despite a 6% decrease in revenue to $75.4 million during the year. The major driver was the legal (-5%) and other revenue (-23%) line items which saw Group EBITDA decline by 2% to $30.6 million.

Cloud revenue was up 8% in FY18 with ~54,000 cloud users, while management noted the continued reduction in desktop revenue due to a user-led transition towards the cloud.

The company was busy innovating during the year, launching its point-of-sale (PoS) product in 2018 and acquiring online medical practice management product, Better Clinics, in July 2018.

The group increased net assets by 19.09% to $15.60 million despite a ~$3.00 million decrease in total assets during the year. The group repaid $6.04 million of borrowings which saw a net cash outflow from financing activities of $9.43 million for the year while operating cash flow increased by $1.2 million to $10.88 million after the de-merger of its Document Management division in 2017.

In a big win for shareholders, the Board approved the reinstatement of the company’s dividend policy, paying out a fully-franked $0.03 per share in September 2018, equating to a dividend yield of around 4.50%. The stock saw a steady increase in its dividend from $0.04 per share in 2006 to a peak of $0.09 (60% franked) in 2015, but business profitability saw this cut in 2016 and 2017.

The stock was up 6.06% yesterday ahead of the earnings announcement and I suspect the $0.03 dividend may not be enough to keep that price high. While the 4.48% year-to-date gain looks good on paper, in the context of a 55.47% decline since January 2018, it’s clear that this is more temporary speculation than good fundamentals.

Foolish takeaway

While Reckon has posted a decent result this morning, it’s a stock that has continued to slide since 2016 and is trading at a P/E multiple of 36x. The company operates in a competitive industry and has found it difficult to keep pace with technological advances.

While today’s result should mitigate huge losses on the market, I’d be steering clear and looking at other Information Technology stocks including Appen Ltd (ASX: APX) or Altium Ltd (ASX: ALU).

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Motley Fool contributor Lachlan Hall does not own shares in any of the companies mentioned. The Motley Fool Australia owns shares of Altium and Appen Ltd. 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.

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