EUR 850.00 For Business Accounts Only

Morningstar | KKR Acquisition Overshadows MYOB’s Solid 2018 Result. See Updated Analyst Note from 21 Feb 2019

Narrow-moat rated MYOB’s 2018 financial result was in line with our expectations but overshadowed by KKR’s likely acquisition of the company. Group EBITDA was within 1% of our forecast, implying no growth on the prior year, although group revenue growth of 7% was respectable and sustainable. Weak profit growth is consistent with management’s long-held plan to transition the company to cloud based products via its Connected Practice strategy. This involves reinvesting profits into the cloud platform and increasing sales and marketing expenditures. In the short to medium term, the strategy will impact profits but should significantly benefit long-term growth and underpin the company’s competitive position.

We continue to believe the KKR acquisition is highly likely to proceed and have largely maintained our earnings forecasts and MYOB’s fair value estimate at the offer price of AUD 3.40 per share. At the current market price of AUD 3.38, we continue to believe the stock is fairly valued. MYOB was permitted to seek alternative offers until Feb. 22, but as none have emerged, we are only more certain that the KKR offer will proceed.

Although KKR is willing to sell its 19.9% shareholding into a higher offer, we expect most potential financial bidders will be reluctant to buy from such a sophisticated investor that has already conducted due diligence on the company. MYOB plans to release its Scheme Booklet in mid- to late-March 2019 with the Scheme meeting expected in mid- to late-April 2019. We will provide our recommendation on the offer following the release of the Scheme booklet. Under the Scheme Implementation Agreement with KKR, MYOB is unable to declare a dividend.

MYOB’s small and medium enterprise, or SME, cloud software subscribers grew by 28% to 388,000 in 2018, but the 19% fall in desktop software users, to 253,000, meant total paying SME customers only grew by 4%. We estimate the non-paying SME user base fell 15% to about 400,000, implying MYOB’s entire SME user base fell 4% to about 1 million customers. However, this is a reasonably good outcome for the company, which is maintaining its large market share in the ANZ market and continues to be a major competitor to Xero. As comparison, Xero had 981,000 paying ANZ cloud customers as at September 2018, although this figure is not perfectly comparable as it includes practice ledger customers, and Xero’s average revenue per paying user is lower.

The Connected Practice strategy is sensible and will extend MYOB’s position in the large accounting practice software market. As Reckon is unable to transition its practice management software to the cloud, we expect MYOB will ultimately dominate this market and support its SME business in the process. It’s likely that the strategy will accelerate under KKR’s ownership and also plausible that KKR will follow Xero into overseas markets, although this isn’t factored into our forecasts and is unlikely within the next couple of years at least.