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A Broker's PreView - MYOB Needs its Head in the Cloud

Overview: MYOB’s latest listing on the ASX adds a little more spice to the Trans-Tasman battle between MYOB and Xero. Their battle can now be measured in market capitalisation, as well as the revenue growth measure so favoured by Xero. Approximately 40 percent of MYOB was sold in the Initial Public Offering at $3.65 per share.

Pros: According to Morningstar research MYOB is still the largest provider of accounting software to small and medium enterprises in Australia and New Zealand with about 48 percent of the market, or 1.2 million users.

MYOB’s market share is indicative of its incumbent status in the NZ and Australian market. The company had a head start, being founded in 1991 by Craig Winkler, who incidentally is now a Xero shareholder. This market share helped MYOB report a Net Profit after Tax of AU$28million in 2014 and is why most expect underlying earnings in the region of AU$85million for 2015; a stark contrast Xero’s NZ$69.5million loss.

Cons: Of course Xero’s loss comes on the back of their international expansion plans. MYOB appears to have no such international ambition at this stage.

MYOB’s incumbent status also poses other problems. Of the 1.2 million users noted above, 700,000 users have perpetual licenses, meaning that they pay no ongoing fees to MYOB. The Company will be looking to transition these clients over to cloud based accounting with recurring revenue as the old software become obsolete.

Clearly Xero will be looking to pick off these clients also, so competition in the sector will remain fierce. Switching costs, such as the time it takes to learn new systems and people’s natural aversion to change may give MYOB and edge in keeping these clients.

Price performance: Investors who took part in the IPO will be pleased as the company has traded north of $3.65 since listing.

Investment outlook: A different kettle of fish to the high growth Xero story. MYOB trade on a forward price to earnings ratio of 26.5, meaning they will need to achieve earnings growth to justify the current share price.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

 

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