Class Limited is a provider of cloud based administration software for self-managed superannuation fund (SMSF) with around 25% of the market share. It has good fundamentals and was able to enter an agreement with big four accounting and professional services firm KPMG as its SMSF administration software.
Position Size Portfolio Equity = 100k
Risk = 1.0%
ATR Multiple = 2
Recommended Quantity = 2,000 shares
Initial Buy = 1,000 shares @ $2.95 - Brokerage: $19.95 - Stop: $2.45
1st Average Down = 1,000 shares @ $2.81 - Brokerage: $19.95 - Stop: $2.45
SOLD all 2K @ 2.94 on 27/2/2018
WHY I DECIDED TO BUY
- High Recurring Revenue. At 31 Dec 2017 recurring revenue, for the software licence fees that make up 95% of our revenue (ACMR), was $33.7m.
- Insider Trading: Over the past 3 months, more shares have been bought than sold by Class’s’ insiders. In total, individual insiders own over 29 million shares in the business, which makes up around 24.83% of total shares outstanding. The entity that bought on the open market in the last three months was Pinnacle Fund Services Limited Spheria Asset Management Pty Ltd.
- AMP Limited will be migrating its SMSFs to in-house software. This represents 9,500 funds, or just under 5% of annual committed revenue, but it is still a decent chunk of change for Class.
- Acquisition cost for new clients has risen significantly. In the prior period it was $112, but in this period it has risen 20% to $135, meaning it takes around seven and half months to earn back the acquisition cost.
- Average revenue per unit dropped. For Class Super it dropped from $218 to $215 and for Class Portfolio it dropped from $147 to $139. This could be a sign it has to give discounts to win new business.
- Financial Technology or most commonly known as ‘FinTech’ refers to the use of technology as medium of delivering financial solutions.
- The consumer mindset has shifted toward alternatives to banking institutions for financial solutions. -
- Consumer demand for digital financial services derived from rapidly growing globalisation, technological competition and growth has created a new era for FinTech.
- FinTech companies give individuals innovative ways to raise debt and equity financing, managing finances and make payments through telematics.
- Internet and mobile payments is the current focus of FinTech and has been the major driving force in the growth of the industry, especially in developed nations.
Chart Update - Feb 2018
The Class share price has fallen due to a few different reasons.
Class reports its growth of SMSF portfolios each quarter. This growth has always been positive, but it has slowed down dramatically in recent times.
In its update for the three months to 30 September 2017 Class reported that the number of SMSF accounts increased by 6,232 to 146,922 and the market share is now 25% of the estimated 598,000 SMSFs.
The market had gotten used to Class reporting growth of SMSFs of above 10,000 each quarter.
The government has been messing around with what SMSFs are required to report, which partly explains why Class’ short-term growth has slowed.
Class’ competitor, BGL, is ramping up its cloud product which could also explain the slowdown.
However, if Class’ understanding of the situation is correct then growth could return to normal in future quarters.
In the 30 September 2017 update Class also gave an update for its Class Portfolio product. This product is for non-SMSF portfolios like family trusts.
Class Portfolio grew by 12% to 3,631 accounts to 30 September 2017.
Class has an impressive list of financial statistics. In FY17 it grew its earnings before interest, tax, depreciation and amortisation (EBITDA) margin from 44.5% to 48.4% and the net profit after tax (NPAT) margin from 25.8% to 27.6%. The balance sheet is in very good shape with $19.4 million cash (and equivalents) whilst having no debt.