Weekend Herald

Pos­i­tive out­look sends Xero shares soar­ing to new heights

- Chris Keall Business · Linkin Park · Fisher & Paykel Healthcare · Fisher & Paykel Ltd. · RBC Capital Markets · United Kingdom · Google · Australia · United States of America · Intuit · North America · iOS · Android · Xero · New Zealand Exchange · Fisher · ASX · Google Insights for Search · MYOB · Ridgewell

Xero shares rose 4.9 per cent to an all- time high of A$ 112.95 in Thurs­day trad­ing — giv­ing the cloud ac­count­ing soft­ware com­pany a mar­ket cap­i­tal­i­sa­tion of A$ 16.1 bil­lion ($ 16.4b).

Had it re­mained on the NZX, Xero would now be ranked as the sec­ond most- valu­able lo­cal com­pany be­hind Fisher & Paykel Health­care.

The now ASX- only firm has been on a bull run since a mid- Au­gust up­date that re­vealed it was still adding sub­scribers in all its ma­jor ter­ri­to­ries, de­spite pan­demic lock­downs — if at a slower rate than 2019.

The lat­est surge was fu­elled by an Oc­to­ber 7 re­search note from RBC Cap­i­tal Mar­kets, which up­graded Xero to “out­per­form” and hiked its 12- month tar­get price from A$ 92.00 to A$ 123.00 ( for a A$ 17.6b mar­ket cap).

That tar­get im­plies some heady mul­ti­ples. Last year Xero made a net profit of $ 3.3m and ebitda of $ 137.7m on op­er­at­ing rev­enue of $ 718.2m. RBC’s team of an­a­lysts is pick­ing ebitda of $ 179.7m for 2021 and $ 387.3m by 2023.

But RBC is pick­ing there will be fur­ther stim­u­lus spend­ing that will keep small busi­nesses ( Xero’s main tar­get) rel­a­tively buoy­ant.

And the wealth man­ager also sees Xero con­tin­u­ing to do well in its “Bat­tle for Bri­tain” with ri­val Sage, based on Google Trends search re­sults — which, in turn, it sees as in­dica­tive of what ac­count­ing soft­ware is catch­ing the at­ten­tion of would- be sub­scribers.

Ditto for Aus­tralia, where Xero is more searched- for than its re­gional arch- ri­val MYOB.

The only flat point in the Google Trends analysis is the US, where In­tuit’s Quicken re­mains the dom­i­nant house­hold name and Googling for “Xero” has plateaued.

Cur­rent chief ex­ec­u­tive Steve Vamos has put less em­pha­sis on crack­ing North Amer­ica than his pre­de­ces­sor Rod Drury — although Craigs In­vest­ment Part­ners re­search an­a­lyst Stephen Ridgewell — a Xero bear — re­cently told the Her­ald that the com­pany would need a break­through in the US to jus­tify its cur­rent val­u­a­tion.

RBC finds a sec­ond largely pos­i­tive ex­ter­nal in­di­ca­tor, too, say­ing “app down­load data con­tin­ues to im­prove over re­cent months which au­gurs well for Xero sub­scriber growth.”

While many use Xero’s soft­ware via the web, an­a­lysts can track num­bers for its iOS and An­droid down­loads, which have lifted 3 per cent for the cal­en­dar year.

The UK — which ac­counts for about 20 per cent of Xero sales — is vul­ner­a­ble to a sec­ond Covid- 19 lock­down, but RBC sees stim­u­lus spend­ing and gains from Sage off­set­ting any im­pact.

RBC also notes that Xero has put off mod­est price in­creases, and of­fered more fea­tures for the same money in the mean­time ( for ex­am­ple, un­lim­ited in­voices rather than 20 per month with its Starter ver­sion), and has man­aged to avoid ri­vals’ deep dis­count­ing.

Xero con­tin­ued to climb yes­ter­day on the ASX, reach­ing a A$ 113.74 in late af­ter­noon trad­ing.

 ??  ?? Xero chief ex­ec­u­tive Steve Vamos.
Xero chief ex­ec­u­tive Steve Vamos.

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