ReadyTech Holdings Limited

Company Overview: ReadyTech Holdings Limited (ASX: RDY) is involved in the Education and Employment segment that offers cloud-based student management systems, skills profiling tools to track on-the-job training, and platforms to assist state governments in coping with vocational education & training programs. The company got listed on ASX in April 2019.

RDY Details

RDY Rides on Decent Fundamentals & Robust Customer Base: The company’s growth strategy is focused on acquiring new, high-value customers and increasing existing customer spending with the help of new product additions and value-added services. RDY has delivered robust like-for-like growth in 1HFY22, maintaining the trend of consistent increases in recurring SaaS revenue and earnings.

Spotlight 1HFY22 Key Numbers:

• Robust Top Line Performance: In 1HFY22, the company’s total revenues increased 63.7% year over year, mainly due to the continued delivery of its strategy to acquire high-value customers. Notably, on a like-for-like basis, revenues went up by 16.8%. Subscription and license revenue increased 56.2% on pcp and accounted for 85% of total revenue.
• Impressive EBITDA & NPAT Growth: In 1HFY22, underlying EBITDA stood at $12.9 million, up 55.2% YoY. Underlying EBITDA margin remained strong at 36%. Underlying NPAT skyrocketed 95.4% on pcp basis in 1HFY22, indicating growth across key metrics, supported by continuous execution of RDY's growth strategy and acquisition of new clients.
• Robust Customer Base: New customer wins and upsells/cross-sell to existing customers were key positives in 1HFY22, resulting in average revenue per new customer of $59.8k, compared to $42.5k in 1HFY21, along with massive user license and module upgrades. Notably, net customer revenue retention increased from 96% from FY21 to 97% in 1HFY22, reflecting the company’s focus on mission-critical software and customer satisfaction.
• Balance Sheet & Liquidity Position: The company has a decent balance sheet with available cash-for-use of $11.3 million, which comprises $7.8 million cash and equivalents, and $3.5 million debt facility headroom. The company’s cash flow from operations stood at $26 million in CY21 basis, up from $21.8 million reported for the full year ending 30 June 2021.
• Acquisition Synergies: Recently, RDY announced the acquisition of PhoenixHRIS, a provider of an advanced cloud-based application tracking system. The purchase consideration consists of $2.1 million as an upfront payment, with total consideration of $3.3 million inclusive of earn out. With this move, RDY will enhance its Workforce Solutions all-in-one capability, as well as will leverage new customer opportunities.

Segments Highlight; Analysis by Kalkine Group 

Key Metrics: For 1HFY22, the company reported an EBITDA margin of 33.4%, higher than the year-ago figure of 32%. In 1HFY22, RDY reported a net margin of 16.3%, higher than the year-ago figure of 6.1%.

Gross Margin Trend; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 58.62% of the total shareholdings, while the top 4 constitute the maximum holding. Pemba Capital Partners Pty Ltd held the maximum number of shares with a percentage holding of 32.29%, followed by Microequities Asset Management Pty Ltd. Holding of 11.19%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company undertakes certain transactions denominated in foreign currency, exposing the business to foreign currency risk through foreign exchange rate fluctuations. Moreover, general economic conditions in Australia, competition in the markets where RDY operates, regulatory concerns, and a leveraged balance sheet, may hamper the financial performance.

Future View:  Following strong 1HFY22 results, the company expects an FY22 organic revenue growth rate in the mid-teens, with an EBITDA margin of 36%-38%. Notably, the acceleration of government support programs is expected to bring sustainable growth opportunities. Further, the recent acquisitions of Open Windows and AVAXA are anticipated to produce incremental FY22 revenue of $2.2 million at an EBITDA margin of 16%.  Considering the above factors, RDY has increased its FY26 organic revenue target to more than $140 million.

Looking forward, RDY aims to deliver organic growth on the heels of the increasing customer interest in higher-value markets for its student management systems and a strong reputation in payroll and HR admin systems. A positive outlook for both the Education and Employment segments will enable the attraction of larger business customers, which, in turn, will add more revenues into the business.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~18.84% in the past three-months. Currently, the stock has a 52-week high and low levels of $4.3 and $1.63, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium as compared to its peers, considering synergies from buyouts, rise in free cash flow, decent long-term view, etc. For the purpose of valuation, peers such as TechnologyOne Ltd (ASX: TNE), Nitro Software Ltd (ASX: NTO), and Bigtincan Holdings Ltd (ASX: BTH) have been considered. Considering improved financial performance, positive long-term outlook, robust customer base, acquisition integrations, current trading levels, indicative upside in the valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $3.13, down by ~0.319% as on 25 March 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

RDY Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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