Categories
Technology Stocks

Xero Ltd (XRO) delivered strong top-line growth in FY22 driven by YoY growth

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Investment Thesis

  • Competent leadership team with a proven track record of delivering strong growth (Strong top-line momentum driven by strong support of accountants and bookkeepers with annualised monthly recurring revenue increasing at CAGR 32% and strong subscriber growth with positive LTV (Lifetime Value) trends (over FY17-22, ANZ LTV grew at CAGR 34% and International LTV grew at CAGR 49%). 
  • Solid product offering that is secure, scalable and efficient technology which is competing against competitors with technology that has legacy issues. XRO’s small business platform is an ecosystem of more than 700 connected apps backed by a community of more than 50,000 users of XRO’s API developer tools. Going forward the Company could potentially increase its revenue by monetising its platform in other ways like charging third party app developers. 
  • Potential for meaningful acquisitions to fill gaps in product capability. The Company is well positioned to make acquisitions going forward (given its balance sheet and funding status). 
  • The Company continues to focus on cloud accounting, and there’s a significant upside potential in the sector given the fact that the current levels of small business cloud accounting adoption globally is estimated to be less than 20% of the total market or opportunity across English-speaking countries in which the Company operates. 

Key Risks

  • Decrease of migration to cloud software. 
  • Currency headwinds due to weakening of NZ$ relative to AUD, USD and Pound. 
  • Deteriorating sentiment if the economy and IT spending weakens. 
  • Excessive competition from other established players like Intuit leading to loss of market share.
  • Inability to extract higher operational efficiencies as the Company scales up. 
  • Issues in gaining market share especially in markets with established incumbents 

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Operating revenue grew +29% YoY (+30% in CC) to $1.1bn, with Core accounting revenue up +23% driven by subscriber growth (up +19% YoY to 3.3 million) and ARPU increases (driven by price increases) and Platform revenue up +113% (to account for 11% of total operating revenue) driven by growth in payments, payroll and revenues from recently acquired businesses including Planday. 
  • Gross profit increased +31% YoY to $957.4m with margin improving +130 bps to 87.3% (includes the operations of Planday), largely due to efficiency gains in customer support teams and hosting costs for cloud-based products.
  • Total operating expenses, inclusive of acquisition integration costs, increased +39% YoY, reflecting greater investment in product design and development and sales and marketing expenses as travel cost resumed, resulting in -32% YoY decline in operating profit to $42m. 
  • Net loss was $9.1m vs net profit of $19.8m in FY21, impacted by a fair value revaluation gain on contingent consideration of $38.9m, a new revenue incentive with Planday management resulting in a $10.5m expense and goodwill impairment relating to the acquisition of Waddle of $20.4m. 
  • Free cash flows declined -96% YoY to $2.1m as +8% YoY increase in operating cash flow was more than offset by +117% YoY increase in investments. XRO has $150m of undrawn committed debt facilities. 
  • Total LTV increased +43% YoY to $10.9bn in FY22 (equating to 5-year CAGR of +34% for ANZ and +49% for International), equating to LTV/CAC (LTV/customer acquisition cost) of 6.9x (up +0.5x YoY), driven by good progress on subscriber growth, a marked improvement in average revenue per user (ARPU) of +7% YoY (+9% in CC), along with a -11bps YoY decline in monthly churn to 0.90%, which remained consistently below pre-Covid pandemic level. 

Company Description

Xero Ltd (XRO) is a software as a service (SaaS) company, engaged in the provision of a platform for online accounting and business services to small businesses and their advisors. The Company operates through two operating segments: Australia and New Zealand (ANZ), and International (UK + North America + Rest of the World).

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks

The current share price of VRT is largely reflecting the takeover offer from UK based CapVest Partners

Investment Thesis

  • Currently under takeover activity, with an offer from CapVest Partners for $7.60 per share.
  • The Aging Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favourable demographic tailwinds. 
  • Potential accretive acquisitions domestically and internationally. Domestic acquisition of other laboratories will consolidate VRT geographic expansion strategy along the eastern seaboard of Australia. 
  • Earnings increasingly become diversified as international segments are expected to become a larger contributor. 
  • Solid balance sheet with flexibility to execute expansion strategies. 
  • Market-leading position with ~40% of domestic market share.

Key Risks

  • Current takeover activity does not lead to a transaction. 
  • Regulatory risk as changes in government funding may increase patient’s out-of pocket expenses and thereby decrease volume demand. 
  • Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue.
  • Weakening cycle activity continues to adversely impact revenues. 
  • Increased competition from low-cost providers. 
  • Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment. 
  • Execution of international forays goes poorly.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Revenue increased +1% to $171.3m, however, EBITDA and NPAT declined -36% and -50% to $37.9m and $15.2m, respectively, primarily due to higher operating expenses, margin erosion from cancelled/deferred cycles during the period and pcp including $7.7m of Covid-19 related Government assistance and a fair value gain of $1.6m on a contingent consideration vs $2.6m of M&A transaction costs in current period. 
  • Net debt declined -19% over 2H21 to $76.5m, leading to leverage improving to 1.3x. 
  • The Board declared a fully franked interim dividend of 12cps, representing a payout ratio of ~65%. However, the Board expects a 2H22 dividend to be based on a full year dividend range of 45-55% to enhance balance sheet flexibility for investment in organic and inorganic growth initiatives.
  • Australia revenue increased +1.8% driven by fresh IVF cycles growth of +1.3%. Premium service volumes (~80-85% of revenue) increased +1.2% with growth in all regions, The Fertility Centre (TFC) volumes (~15-20% of revenue) increased +1.7% (remained severely disrupted by the prolonged lockdowns), Fertility diagnostic revenue increased +8.5% amid growth of Preimplantation Genetic Testing (PGT) activity, and Day Hospitals revenue increased +4.3% amid improvement in demand for non-IVF procedures, which now account for ~50% revenue. Segment EBITDA declined -21% amid higher employee costs reflecting expansion of the workforce and Covid-19 related cancelled/deferred cycles.
  •  International revenue declined -2% and EBITDA declined – 19% with Singapore down -18% (fresh cycle volumes down -16.3%), Denmark down -24% (fresh cycle volumes down -8.4%), Ireland down -14% (fresh cycle volumes increase of +0.8% more than offset by preconception genetic screening roll out delays and constraints on egg donation program) and U.K. down -11%.

Company Description

Virtus Health Ltd (ASX: VRT) is a global provider of assisted reproductive services. The group’s main activity is providing patients with Assisted Reproductive Services such as specialized diagnostics, fertility clinics and day hospital services. It has 116 fertility specialists who are supported by over 1100 professional staff and is the largest network and provider of fertility services in Australia and Ireland, with a growing presence in Singapore. Virtus is one of three major players which collectively control more than 80% of market share and was the first infertility treatment company in the world to float on the stock market.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Global stocks Shares

Washington H. Soul Pattinson and Company Ltd (SOL) reported strong 1H22 results reflecting a strong uplift in profit

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Investment Thesis

  • Trades on fair-value in terms of the valuation. 
  • The portfolio is well positioned and diversified, providing access to a range of asset classes across sectors, including equities, private equity, private credit and property. 
  • Solid investment philosophy/approach as investment strategies have delivered above market returns for over 5-yr, 10-yr, 15-yr and 20-yr timeframe. 
  • Strong management/investment team led by Rob Millner, with solid credentials and a strong track record of execution and active stewardship of capital. 
  • Strong track record of paying a consistent and increasing dividend for over 20 years.

Key Risks

  • Deterioration in performance in investments. 
  • Global and Australian economic conditions deteriorate. 
  • The investment Manager/analysts miss-calculate their bottom-up valuation of investments.
  • Reliance on the investment team and their expertise to outperform investment benchmarks. Hence key man risks and departure of key investment personnel, especially Rob Millner.

Key Highlights: Relative to the pcp and on a constant currency basis: 

  • Strong uplift in profit after tax of $343.7m, up +281% relative to the pcp of $90.2m. 
  • Net Cash Flow from Investments of $182.6m, was up +114% (or on a like for like basis, excluding the acquisition of Milton, was up 81%).
  • Pre-tax Net Asset Value per share up +3.4% for the period (outperformance of 8.6% against market). After tax Net Asset Value per share up +17.7% over first half (outperformance of 22.9% against market).
  • SOL completed its merger with Milton Corporation. 
  • The Board declared a fully franked interim Segment; EBITDA declined -21% amid higher employee costs reflecting expansion of the workforce and Covid-19 related cancelled/deferred cycles.
  • Completed merger with Milton Corporation.
  • Goodwill of $954m was created because of an increase in SOL share price between the date the transaction was announced to the market and the date control passed to SOL (5 October 2021).
  • 1H22 statutory profit was impacted by a one-off, noncash impairment of all the goodwill associated with the transaction.

Company Description

Washington H. Soul Pattinson and Company Ltd (ASX: SOL) holds a diversified portfolio of uncorrelated investments across listed equities, private equity, property and loans. It has a flexible mandate to generate returns by making long-term investment decisions and adjust the portfolio by changing the mix of investment classes over time. The Company is the second oldest publicly listed company on the ASX and has been successfully managed by the same family from the outset: Lewy Pattinson, Fred Pattinson, Jim Millner and current Chairman, Rob Millner.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.