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Is the Class share price in the buy zone?

The share price of software provider Class Ltd (ASX: CL1) has risen 1.4% to $1.47 (at the time of writing) following the release of its June 2019 quarterly update on 4 July. 

What happened in the June 2019 quarter? 

The quarterly update revealed that accounts growth continues to be soft. For the quarter, Class saw total accounts increase by 2,461 to 179,082, with the total amount of Class customers increasing by 39 to 1,545. 

For Class Super, the company added 1,787 accounts – net of ~300 suspensions from clients of AMP Limited (ASX: AMP) – bringing the total amount to 171,447. The growth in the number of new accounts added to Class Super has materially slowed over the last several quarters.

The slowdown in account growth has occurred for a number of reasons, including increased competition in the industry and regulatory uncertainty stemming from the proposed changes to franking credits legislation in the lead up to May’s Federal Election.  

Pleasingly, Class Portfolio saw its second largest ever growth recorded, with 674 accounts added, bringing the total number of accounts to 7,635. Class also noted in the update that 33% of Class Super customers now use Class Portfolio. 

A turnaround story? 

The company’s new managing director and CEO, Andrew Russell, acknowledged in the update that growth levels remain under pressure. However, with no changes in franking credits legislation and an increased focus on product, marketing and sales, there is an opportunity for Class to increase earnings growth in FY20 and beyond. 

The increase in competition and regulatory uncertainty has seen Class shares fall by around 31% over the last 12 months. Consensus earnings per share estimates have also fallen by 19% and 31% for FY19 and FY20 to reflect the market’s lowered expectations. 

Class also announced in the update that it has signed wealth accounting group Findex to provide a trust accounting solution for their clients. Furthermore, Class expects to see a change in its earnings profile via its investment in Philo Capital Advisers, a leader in the provision of services to the managed discretionary account sector. 

At current prices, Class shares are trading for around 21 times FY20 earnings, which is a reasonable forward multiple in my view, given its future earnings prospects. However, I would like to see a material increase in new accounts added before considering whether to buy shares in the company. 

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Motley Fool contributor Tim Katavic has no position in any of the stocks 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.

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