Morningstar | Mind Your Own Backtrack. KKR Pulls Back Bid for MYOB and We Revert to Our Standalone FVE of AUD 3.94. See Updated Analyst Note from 20 Dec 2018
We revert to our pre-offer fair value estimate for MYOB following KKR's revised bid for the accounting software firm. Presumably, KKR sees value beyond their lowered bid price of AUD 3.40. We certainly do. Our pre-offer estimate for the firm was AUD 3.82, and when factoring in the effect of time value of money, we increase our fair value estimate to AUD 3.94 per share. MYOB is a high-quality company, with a narrow economic moat sourced from customer switching costs. And with a share of around 65%, the firm already boasts a dominant position in the small and midsize enterprise, or SME, segment. At a nearly 14% discount to our intrinsic assessment, KKR's amended bid is too low, in our opinion. Last trading at around AUD 2.90, shares in MYOB are materially undervalued.Initially proposing AUD 3.70 per share in October 2018, KKR increased their bid to AUD 3.77 in November--just 1% below our previous fair value estimate. Accordingly, we slightly lowered our fair value estimate to match KKR's bid of AUD 3.77, as we thought this a fair price, and shareholders unlikely to realise more than KKR's bid. However, KKR surprisingly backtracked, dropping its offer price to AUD 3.40 per share following due diligence. At this stage, management has declined to recommend the proposal, and we think there is now a high probability of the deal falling over completely.
Nevertheless, MYOB offers appealing value as a standalone business. The firm continues to demonstrate strong growth in SME subscribers, and a commanding market share. We forecast MYOB to continue to grow users at a CAGR of more than 5% over the five years to fiscal 2022. This is driven by MYOB's cloud offering, which we expect to expand at nearly 16% over the same time period, including transitions of desktop clients to cloud. We forecast 12% annual declines in non-cloud customers to fiscal 2022.
MYOB Group is engaged in development and publishing of software and the provision of services for small and medium enterprises, including accountants in public practice. Co.'s operating segments comprise of SME Solutions, which provides business management software and services to small and medium enterprises; Practice Solutions, which provides business software and services to accounting professionals in practice; and Enterprise Solutions, which provides enterprise resource planning and human resource management software and services to medium and large enterprises.
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