BHS: Class Ltd – CL1:ASX

Interesting company, think XRO, but primarily targeting the SMSF industry, focussed on accountant and SMSF fund manager clients. From their site:

Our mission is to deliver innovative administration solutions that automate manual workloads, driving high levels of processing efficiency and scalability and supporting accountants and their clients with delivering digital SMSFs.

They seem to be doing this well, with consistent customer retention of over 99%. They’ve got about 27% of the SMSF market, so there’s room for growth (even if it’s just in Australia), and they consistently win awards. In 2019: 

They have flagged that they are also going to pursue the trust industry into the future. This should increase their TAM pretty significantly as it’s a huge vehicle for small business structures in Australia. Their latest presentation has this product hitting the market in 2021.

One thing to note is that in 2018 they had lower margins due to regulatory reform/requirements  changes in the SMSF industry. This seems to have lead to a change in their RoE (dropping it a few % points from 34-31%). This is still high enough that it’s not that important. 

Weighing machine

They seem to be really well managed. Usually hitting the ~30% RoE level, Payout ratio of 65-70%, and book growth of about 10-15%. Definitely not growth stock material but in what I’d call quality yield with a chaser of organic growth bracket. Cash flow is maintained with a solid buffer consistently, and their growth curve is a nice organic one. Dividend yield is about 4% which also isn’t bad. 

Voting machine

They’ve been dropping in popularity since listing – With PEs initially in the high 50s that have come down every year. Currently they’re trading at a much more sensible ~15x (trailing). 

Recent events

They released their half year results in February, and this year they had a 30% hit to first half NPAT, though Revenue grew 8%. This seems to be primarily due to costs associated with the acquisition of NowInfinity, which is an accounting documentation package that should fuel further growth into the accounting trust and SMSFindustries. They acquired it for the nett sum of AU$25M, comprising of $10M cash (funded by debt), $10M in shares, and further payments of $5M. The expected return this year from the platform is $7M in revenue (their FY19 Revenue was $38.6M. So a 20% increase).

They have been very quiet since the coronavirus outbreak. Not releasing any operational updates. I don’t think the market likes this, as their price hasn’t recovered to pre-virus highs like alot of the tech industry. But I suspect they should have done quite well during this period. There was solid insider buying through March, which ended at pretty much the bottom. 

I feel like there’s a strong chance for them to surprise on the upside, as their price is closer to the Corona bottom than the Dec peak.

Valuation

SWSt has them valued at $1.97

My 7YCF has them at $1.13

My WeVo Valuation (With EVA heavily skewed to the BEAR model (85%) due to the failure of their popularity over the years) has them at $1.79. 

Final thoughts

Pros: I really like these guys. Trying not to be too gushing, but they give me good vibes. Award winning. Managed in a Quality style. High RoE. Reasonable price. Growing TAM. 

Cons: Not a worldwide player so scope for growth may be limited. SMSF and Trust market is subject to regulatory whims, the federal government regularly tries to do away with it, but got totally shut down for it. Their PE has been contracting severely for years, and the share price has been dropping along with it. 

Result: Buy. It’s a solid, high quality business, trading at below the market average. Hopefully the NowInfinity acquisition, and trust focus speed up it’s growth trajectory. Also hoping that they see an uptick in business from the digitisation boom that seems to be accompanying the pandemic. Buy at ~$1.20. Sell at ~$4.35.