##{"id":69913,"date":"2017-08-17T10:00:02","date_gmt":"2017-08-17T00:00:02","guid":{"rendered":"https:\/\/www.fnarena.com\/?p=69913"},"modified":"2017-08-17T10:00:02","modified_gmt":"2017-08-17T00:00:02","slug":"class-continues-to-wrap-up-strong-returns","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2017\/08\/17\/class-continues-to-wrap-up-strong-returns\/","title":{"rendered":"Class Continues To Wrap Up Strong Returns"},"content":{"rendered":"

Financial services software provider Class Ltd delivered a strong FY17 although margin growth is expected to taper off as investment ramps up in FY18.<\/p>\n

-Migration of AMP accounts to take some time, providing breathing space
\n-Positive superannuation reforms may take longer to realise
\n-SMSF administrative purchasing decisions may be pushed out<\/strong>
\n <\/p>\n

By Eva Brocklehurst<\/p>\n

Financial services software provider Class Ltd ((CL1)) delivered a strong FY17 result. Established clients grew 7%, and contributed around 26% to the growth in the portfolio. Cost control and operating leverage delivered a better margin performance.<\/p>\n

Operating earnings (EBITDA) margins expanded to 48.4%, versus 44.5% in FY16. Margin growth is expected to taper off as investment in the business ramps up in FY18 to drive customer acquisition.<\/p>\n

Average pricing for SMSF (self managed super funds) fell -1.4%, driven by the volume discount for the Findex accounts coming online in the second half. Brokers observe some customers are growing accounts under administration and qualifying for volume discounts.<\/p>\n

The migration of AMP ((AMP)) accounts is deferred, as AMP has to give the company 90-days notice before migration begins and it could take around six months for these accounts to move fully once notice is given. The company is set to lose around -7% of its SMSF volumes over time as a 11,000 AMP accounts are taken in-house.<\/p>\n

Ord Minnett believes growth is attractive, as not many software companies actually grow organically, and the returns are high<\/strong>. Furthermore, market expansion is putting the company within reach of segments it previously did not address directly.<\/p>\n

Wilsons agrees, expecting strong adoption of cloud administrative software will drive growth, while the fact that AMP contracts may stay around for longer is helpful in terms of near-term revenue.<\/p>\n

Overall, the broker reduces forecasts for earnings per share in FY18 and FY19 by -7% and -12%, respectively, because of the re-basing of margins on the back of increased investment to drive long-term growth. Compound operating earnings growth of 21% is expected going forward.<\/p>\n

Wilsons, not one of the eight stockbrokers monitored daily on the database, retains a Buy rating and $3.52 target. The broker believes the ongoing adoption of cloud-based SMSF functions and the fact that Class holds a dominant market share remain supportive factors for the stock.<\/p>\n

Super Uncertainty<\/u><\/p>\n

Ord Minnett observes the share price has moved sideways since January which is probably stemming from the fact that super reforms will take longer to materialise. Nevertheless, this is still a positive tailwind, and one which is likely to benefit the company as well as patient investors over the next 12-18 months.<\/p>\n

The broker also believes the emerging organic growth warrants consideration and non-SMSF product still offers significant upside potential. Ord Minnett expects more than 30% per annum growth rates in free cash flow through FY18-20 and the associated visibility of this growth profile justifies a premium rating. The broker reiterates a Buy recommendation and $3.80 target.<\/p>\n

Moelis, not one of the eight monitored daily on the database, maintains a Hold rating and $3.37 target. The broker does not believe regulatory uncertainty will help in FY18, as requirements for real-time reporting have been pushed back by nine months to June 2018 from October 2017.<\/p>\n

This means the need for accountants to adopt cloud-based real-time reporting products is likely to be deferred<\/strong>. Moreover, changes to capital gains tax relief is likely to be a distraction for accountants in FY18 and this mean SMSF administrative purchasing decisions could also be pushed into FY19.<\/p>\n

The company's platform reduces the time spent on administration and compliance of SMSF and investment accounts, enabling accountants, financial planners and administrators to focus more on revenue-generating work.<\/p>\n

FNArena's database has two Buy and one Hold for Class, with UBS and Morgans yet to update on the results. The consensus target is $3.52, suggesting 21.1% upside to the last share price.
\n <\/p>\n

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"