Over the last decade, the role of the typical public accountant has morphed from the old number-crunching, box-ticking role to that of being a value-adding custodian of their clients’ wealth.
Behind the ‘fun’ part of dispensing sage counsel, quotidian functions need to be fulfilled to ensure legal and corporate compliance and the smooth running of the practice.
A leader in the self-managed super fund (SMSF) administration sector, the ASX-listed Class Limited (ASX: CL1) has sniffed the opportunity in the broader back-office domain.
After all, the Class DNA is all about building complex rules-based coding to streamline accountants’ work flows.
With a bulging war chest, Class has sought to transform this cottage industry with four quick-fire acquisitions.
In the latest foray, Class in August announced the purchase of legal documentation firm Topdocs for $13 million ($11.7m cash and $1.3m in Class scrip).
In February this year Class bought the document management business Reckon Docs from the listed accounting software house Reckon, for approximately $13 million.
In early 2020 Class bought the privately owned Nowinfinity for approximately $25 million cash, followed by Smartcorp (also a document business) for $4.2 million.
Meanwhile, Class has entered the trust accounting arena organically, launching its greenfields Class Trust arm last October.
(With the growth of the SMSF sector stalling because of regulatory constraints, the trust market is seen to have better prospects).
Class CEO Andrew Russell estimates Class now has 18% share of the document management and compliance sector, compared with the nearest rival on 6-7%.
“The industry is still fragmented, there are lots of small players,” Russell says “We are by far the market leader and we intend to really take hold.”
At the heart of Class’s acquisition spree is a classic cross-selling strategy.
As Russell explains, the acquisitions expand Class’s accountant client base from 2,800 customers as of June 2020, to more than 7,700 now.
“This market really gives Class the opportunity to move right up the front of the value chain of the wealth accounting customer,” he says.
It’s hoped that the legacy SMSF clients will use Class’s broader suite of administration software, to streamline functions such as changing addresses or adding or removing fund directors.
The acquisitions are part and parcel of Class’s Reimagination strategy, which has expanded Class’s addressable market by 250%, to $365 million.
The fruits of the Reimagination plan – now in its third year – were evident in the Company’s financial results for the year to June 30 2021.
Class posted a 25% revenue increase to $54.9 million, exceeding guidance of 22%, which included $17.7m of earnings before interest tax depreciation and amortisation (EBITDA).
Management forecasts 18% revenue growth to $65 million for the current year, with Topdocs alone adding $14m of revenue on an annualised basis.Adjusting for a $3.2 million write down of the value of disposed business Philo Capital, EBITDA is forecast to surge 19% to $25m.
The $54 million acquisition spree meant that debt has doubled to $21m, but Russell describes the gearing ratio of approximately one times EBITDA as “well within tolerances”.
Class has a $25 million budget for further acquisitions and is eyeing “interesting” targets under its so-called Horizon 2 strategy.
Russell says Class could also grow revenue organically, by tapping the potential of cross selling to the expanded client base.
At the same time, management has also sought to expand margins by purging uncommercial legacy contracts and ceasing any unsustainable discounting.
“The key message is we are in a good spot and we don’t need to buy anything further if we don’t want to leverage our position right now,” Russell says.
Insofar as acquisitions go, Class will consider opportunities that involve new products, or scaling the business in existing products. Offshore acquisitions are not out of the question, either.
“We have the credentials to consider big acquisitions … that would fast track us to $100 million [revenue] and above,” Russell says, adding that executing a small acquisition takes up just as much management time as a larger one.
Currently Class bears a modest market capitalisation of $240 million but “if we can get this business rocking and rolling a billion dollar market cap is not that far away,” Russell says.
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*Owners of this website are CL1 shareholders
Tim Boreham edits The New Criterion
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