Xero shares get a boost from upbeat meeting

Xero shares were up 3.5 per cent to A$92.50 as the ASX opened yesterday, following its upbeat market update on Thursday.

At its AGM, the cloud accounting company said it could still not provide any guidance for the 2021 full year, due to Covid uncertainty. But it did say it had added a net

96,000 subscribers over the first three months of its new financial year (April to June) for a new total of 2.38 million.

That represented a slowdown. The company had an average net gain of 117,000 subs per quarter over FY2020.

Craigs Investment Partners research analyst Stephen Ridgewell noted that Xero had a net addition of 40,000 customers for the first quarter of FY2020 versus 24,000 per month for the first three months of the new financial year — a 40 per cent decline in growth.

Still, investors seemed to find succour in the fact that the trend remained positive.

Xero said it made a net gain in every region, but Australia and New Zealand were the strongest.

Ridgewell hailed Xero’s “resilience to the ‘rona” and chief executive Steve Vamos’ allusion to releasing a product for “less complex SMBs”, which the analyst interpreted as a “Xero-lite” product that could boost growth.

And after Xero squeaked into the black last year (when it made a net profit of $3.3m, ebitda of $137.7m and operating revenue of $718.2m), he sees a net profit of $34m for the

2021 full year and ebitda of $195m.

That represents robust growth — but not, in Ridgewell’s opinion, enough for Xero’s share price to be close to its all-time high (the stock has a 52-week range of A$54.69-A$96.56).

To justify its dizzying market capitalisation of A$13.2 billion, Xero needs to succeed in North America, Ridgewell says. But he doesn’t see a breakthrough in the US any time soon. In the first quarter, the lion’s share of growth came from Australasia.

Ridgewell continues to rate the company “underweight”, though after Thursday’s update he did raise his 12-month target price from A$69.60 to A$78.00.

Also at the AGM, two high-profile directors were re-elected: founder and former CEO Rod Drury, and Afterpay president Lee Hatton, both with 99 per cent-plus support.

They were joined by newcomer Mark Cross — the Auckland-based professional director who also sits on the Z Energy, Chorus and Genesis Energy boards and chairs Milford Asset Management.

Cross, who was appointed by the board on April 1, also received backing from more than 99 per cent of shareholders.

It was also the first annual meeting appearance by new Xero chair David Thodey.

He and Vamos hit the same theme: it was impossible to give any financial forecasts, but many small businesses still have no accounting software and could adopt it as an efficiency measure to help them survive the pandemic.

Continuing uncertainty about the coronavirus meant it would be speculative to comment on its effect on the rest of 2021, Thodey said.

Vamos told investors that “operating conditions remain uncertain and we continue to anticipate an impact from Covid-19 on Xero’s FY2021 results.

“The pandemic has presented many small businesses and their advisers with a very real example of how cloud enables remote working and powers real-time collaboration,” he said.

“We expect growing recognition of this to fuel the adoption of cloud platforms across the small business sector.”