It is a bitter commercial fight between MYOB and Xero – not to mention the likes of Reckon and Intuit – but now the rivalry moves to the stock market.
As accounting software firm MYOB embarks on a $2.3 billion sharemarket float, its approximately 1.2 million customers will be wondering whether a product with which they are familiar will make a good investment.
MYOB – which will list on Monday, May 4 – is actually returning to the stock market, after being bought and delisted by private equity groups Archer Capital and HarbourVest Partners in December 2008, for $450 million. In 2011, US private equity giant Bain Capital paid about $1.2 billion for MYOB. Now the initial public offering (IPO) is looking to raise up to $834 million from the listing, at an indicative price range of $3.00 – $4.00 a share.
This offer will see Bain’s holding falling from the current 95% to 57% (at the midpoint of the indicative range), meaning the total market capitalisation at listing will be approximately $2.34 billion – $2.69 billion.
MYOB provides tax accounting and other services to small and medium-sized businesses. It is the largest player in the Australian accounting software market for small and medium enterprises: according to the prospectus, MYOB has a market share of 60%–65% of the total small and medium enterprise software market. It is also the market leader in the practice software market.
Investors will likely view the company as an alternative on the stock market to bitter rival, the New Zealand-based cloud accounting software provider Xero. Xero has been a phenomenon on the stock market, turning its $NZ1 a share float price in 2007 into a current price of $24.20, and a market capitalisation of A$3 billion – about the same as Air New Zealand. The company listed on the Australian Securities Exchange (ASX) in November 2012, and moved from a listing price of $4.65 to a peak of $41.85 in March 2014, earning Xero the title of the “Apple of Accounting” from Credit Suisse. XRO has subsided to $23.80 at present.
The amazing thing about Xero’s market reception is that it does not make a profit. While that is common for growing SaaS (software-as-a-service) companies – as the cost of customer acquisition and development are heavily front-loaded – there are plenty of analysts prepared to call Xero as over-valued, given that its share price cannot be related to any earnings, and increased competition from competitors such as MYOB, Reckon and Intuit makes the future even more difficult to predict.
Having had to publish a prospectus, there is more information available to investors on MYOB, and more tangible idea as to profitability. (Just before MYOB lists, on 24 April 2015 Xero will release its preliminary financial results for the year ending 31 March 2015.) The MYOB prospectus gives an EBITDA (earnings before interest, tax, depreciation and amortisation) estimate of $160.7 million for FY16, a 14% increase on the expected FY15 figure. MYOB estimates revenue in FY16 will be approximately $336.4 million, giving an expected NPATA (net profit after tax and amortisation) in FY16 of $90.7 million – an increase of 21% on the expected FY15 number. But MYOB’s dividend yield will be only 2.8% – 3.3% in its first full-year.
Contracts for difference (CFD) broker IG – which is operating a “grey market” in CFDs over MYOB in preparation for the float – says that at the estimated FY16 EBITDA figure of $160.7 million, MYOB is priced (at the midpoint of the indicative range) at a price/earnings (P/E) ratio of 14.5 to 16.8 times prospective FY16 earnings.
“These estimates put MYOB in a different league to Xero,” says Evan Lucas, market strategist at IG. “Xero currently has a negative P/E ratio, as it is yet to turn a profit and earnings remain negative. The share price value is more down to future expectations rather than current operations and shareholders are going to have to wait until FY17 on current estimates to see XRO’s net profit turning positive.
“MYOB on the other hand will hit the market with a proven track record and its push into cloud systems will give those a little concerned about XRO’s massive price premium and risky future earnings an attractive alternative in the IT space,” says Lucas.
Interestingly, Bain Capital will not sell any of its existing shares at the time of the listing. “Instead, talk on the street suggests Bain Capital will look to sell out of MYOB in early 2016 if the share price is at a 20% premium to listing,” says Lucas.
MYOB’s re-entry onto the ASX will be keenly watched and will see it entering the information technology sector as the second-largest player behind Computershare.
MYOB says it has about 1.2 million customers, of which only 505,000 are what the company calls ‘paying customers,’ paying recurring membership fees. Growth in MYOB’s user base helped lift revenue by 16%, to $287 million, in the year to December 2014: MYOB says it had more than 116,000 paying subscribers using its cloud products at year-end.
While the SME market remains the bread-and-butter, MYOB has been pushing into larger business territory, announcing its first cloud ERP (enterprise resource planning) product, aimed at the mid-market, in January. The company also has a new payroll solution in the wings.
Last month, Xero announced it had reached 200,000 Australian business customers, up from 158,000 at 30 September 2014, and 109,000 at 31 March 2014. It has also been very active on the update front, including the addition of more advanced inventory management built into the core Xero platform, which the company said moved it “beyond the realm of traditional accounting software.”
It is a bitter commercial fight between MYOB and Xero – not to mention the likes of Reckon and Intuit – but now the rivalry moves to the stock market. MYOB subscribers cannot realistically expect the stock to achieve the share price success of Xero, but they are entitled to consider MYOB attractively priced for its return to the stock market.
