EUR 850.00 For Business Accounts Only

Morningstar | MYOB Likely to be a Tougher Competitor for Xero Under KKR’s Ownership

We continue to view the Australian and New Zealand SME accounting software market as a duopoly between Xero and MYOB. However, Xero’s strong growth in recent years was largely driven by its early-mover advantage in cloud software that is eroding. Looking forward, MYOB is likely to be a more aggressive competitor under the ownership of KKR who we expect will prioritize subscriber and revenue growth over profits in the short to medium term. MYOB is also likely to win market share from Reckon in the accounting practice software segment which could act as a strategic advantage which helps win SME subscribers. Narrow-moat-rated Xero’s share price has been volatile in recent months, falling 30% late last year before rebounding 36% to current levels. However, price volatility has been more market than company related, with little announced by Xero since the interim result last November. Despite the rally, we maintain our fair value at AUD 25.50 per share and, at the current market price of AUD 48.58, continue to believe the stock is materially overvalued. Our fair value implies a fiscal 2020 enterprise value to EBITDA multiple of 7 versus 14 at the market price and we forecast a revenue CAGR of 16% over the next decade. Although Xero’s news flow has been quiet in recent months, it’s main competitor in Australia and New Zealand, MYOB, has been a hive of activity. Aside from the ongoing takeover by private equity firm, KKR, MYOB announced its full-year result last month with its total user base of around 1 million customers reasonably flat on the prior year. MYOB’s cloud accounting software subscribers increased 28% to 388,000 but desktop customers fell 19% to 253,000 and non-fee-paying desktop customers fell 15% to 400,000. We expect MYOB’s customer base to remain reasonably stable for the foreseeable future as desktop customers are replaced by cloud customers.

Xero does not report its full-year result until May but announced 981,000 cloud subscribers in Australia and New Zealand as of Sept. 30, 2019, implying 24% growth on the prior year. We expect subscriber growth to continue but at a slowing rate and we forecast a 7% CAGR over the next decade. However, although Xero’s subscriber growth looks relatively strong, its figures aren’t perfectly comparable with MYOB. From a revenue perspective, MYOB generated AUD 364 million in fiscal 2018 versus AUD 251 million for Xero and we don’t expect Xero’s ANZ revenue to overtake MYOB’s until fiscal 2021. We expect Xero’s subscriber global growth to slow to 31% in fiscal 2019, from 34% in the prior year, implying 1.8 million subscribers as of March 31. As a comparison, global market leader Intuit reported 3.9 million Quickbooks Online subscribers as at 31 December 2018.