A listed fintech company that simplifies back office functions for accountants and financial advisers doesn’t exactly have the same investor ‘sex appeal’ as neo banks, bitcoin players or the buy-now-pay-later sector.
But that doesn’t mean it won’t generate exciting returns for investors.
A giant in the self managed super funds (SMSF) administration sector, Class Limited (ASX: CL1) is well known by small cap fund managers but not by the broader market.
As a result, Class CEO Andrew Russell laments, the $210 million market cap stock is well undervalued compared to other relevant tech plays such as Elmo Software.
Since listing in December 2015 at $1 a share, Class shares have traded as high as $2.30 but at current levels of around $1.70 the performance lags that of the overall market.
But the underperformance isn’t expected to persevere as Class furthers a multi-pronged reinvention push to diversify from the SMSF sector to be a multi-product SaaS technology solutions business.
Known as Reimagination, the strategy expands Class’s addressable market by 250%, to $365 million. In essence Class is leveraging its core skill of building software with complex rules-based coding, to streamline and automate the workflow of accountants’ back offices.
At the heart of the strategy is an acquisition blitzkrieg that saw the company pick up three businesses in the legal documentation management and corporate compliance sector.
In January last year, Class acquired the privately owned Nowinfinity for approximately $25 million cash, followed by Smartcorp (also a document business) for $4.2 million.
In February this year Class completed the trifecta by buying Reckon Docs from the listed accounting software house Reckon, for approximately $13 million.
Meanwhile, Class has entered the trust accounting arena organically, launching its greenfields Class Trust arm last October.
Class has an enviable 40-50% share of the $100 million SMSF administration market, which had been fast growing until the government imposed a $1.6 million cap on super accounts.
“The industry now has a seat belt on it,” Russell says.
Conversely, the trust market is expanding because of this super contribution restriction. “People have to look for other vehicles to expand family wealth and trusts are that vehicle,” Russell says. “We are only going to see the use of trusts grow over the next 10 to 20 years.”
Class Trust aspires to a 20-30% share of a total addressable market (TAM) of $147 million. Russell says the biggest competitor in the trust space is not so much another provider as Excel – a reference to generic do-it-yourself spreadsheets using error-prone, manual processes.
In the document/corporate client sector, the enlarged Class now accounts for about 15% of a total addressable market of $108 million. Russell believes a 20-30% share is a realistic aspirational target for Class.
While the core SMSF sector is low growth, Class benefits from its leading market share and reliable annuity revenues. Russell says the company’s market position is bolstered by the high barriers to entry posed by the need for chunk up-front tech spending.
Recognising the need for Class to invest in ageing technology to support both the acquisitions and the legacy business, the company has earmarked $18 million in I.T. spending in the current financial year (compared with $13m previously).
“We are unapologetic that we need to invest in the business,” Russell says, adding that most of the investment is front-end and $18 million should not be seen as the ongoing rate of spend.
Despite the travails of the pandemic, Class is solidly profitable and even pays a sustainable dividend.
The company recorded December half revenue of $25.9 million, up 27% and a $3.2 million net profit (up 3%). EBITDA grew 29% to $10.4 million.
Management declared 2.5 cents per share interim dividend and increased full year guidance to $54 million up 22%, with a targeted ebitda margin of 40%.
Russell says the company is on target to achieve $100 million of annual revenue within the next two to three years. Further acquisitions are likely, possibly in offshore jurisdictions such as Canada or the US.
“The opportunities are so big it’s a matter of having a laser-like focus to narrow them down,” he says.
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*Owners of this website are CL1 shareholders
Tim Boreham edits The New Criterion
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