RKN 1.82% 54.0¢ reckon limited

RKN Research

  1. 530 Posts.
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    Disclaimer: Please do your own research as this is only my opinion. I am not affiliated with any financial institution and receive no financial incentive for my comments (However I would love to do this for a job - so please contact me if you have job offers!!).

    Reckon Limited (RKN)
    Reckon has 3 divisions: Practice Management (APS, Elite, Docs and nQueue), Document Management (Virtual Cabinet and SmartVault) and Business (Reckon One, Reckon Accounts and Reckon Accounts Hosted).
    Reckon Ltd has recently suffered material falls in its share price due to their 2015 Annual Report which disappointed investors. Reckon Ltd reported a 1.3% decline in GAAP EBITDA and also flagged increased spending on product development, particularly in the Reckon One product. The annual dividend was also cut from 9.00 cents to 7.25 cents per a share (the most recent dividend was unfranked). Management has said the declining EBITDA is as a result of increased development spending and transitioning customers to a subscription based model. Reckon used to sell Quickbooks and was the Australian distributor for intuit accounting products, as a result a large number of potential clients have over the counter Quickbooks. Reckon One is the product Reckon has used to replace Quickbooks after their agreement with Intuit ceased. Reckon One apparently looks and feels similar to the old Quickbooks and the aim appears to be to transition customers to this new cloud based product. More about that later……..
    Valuation:
    Reckon charges most of their development costs against earnings, as opposed to many companies that count development costs as a part of their “earnings”. So when looking at cash flow yield vs PE yield the former appears much higher and is probably a better gage of company value.

    Market Cap: 112M shares on issue = 112M*1.60 = 179M
    Net Debt: 50M
    EV = 179M+50M = 229M
    EBITDA = 37M
    EV/EBITDA = 229/37 = 6.2
    Profit attributable to owners = 15M = 13 cents per share or a PE = 12 (Earnings yield of 8.4%)
    Cash flow = 33M or a cash flow yield of 18.5%
    Note the cash flow yield is much higher and this is mainly down to the depreciation/amortisation coming through in earnings but not showing in cash flow. So if you look at 2015 depreciation and amortisation costs of 13M are being removed from earnings. Yet much of the development spend (20M in 2015) is being expensed.

    Valuation by division:
    Practice management
    EBITDA = 20M
    I think this is highest quality part of the business and I will explain why at the end, as a result I would pay an EV/EBITDA = 6 to 9 for just this part of the business.
    Valuation = 120M to 180M
    Business section
    EBITDA = 19M
    Use EV/EBITDA = 5 to 8
    Valuation = 95M to 152M

    Document Management
    EBITDA = 5M
    Use EV/EBITDA = 6 to 9
    Valuation = 30M to 45M
    Note: These are valuations that look quite conservative compared to equivalent types of businesses.
    Costs
    Central office and costs spread across all divisions add to about 10M. As a result my EBITDA total for each section will not match the company total. I have reduced the multiple EV/EBITDA I would be prepared to pay to account for this.

    Debt of 50M also needs to be subtracted
    Lower range = 120+95+30 – 50 = 195M OR $1.74 per share
    Upper range = 180+152+45 – 50 = 287M OR $2.56 per share
    Note: These values are very approximate and if the business does well it will be worth significantly more than the upper value over time. The reverse is also true as is the case for any business it could go broke. I think the latter is unlikely (though not impossible). The company has little debt and a few cash cows, such as APS, it can milk if it gets into trouble. The important thing is at current prices we are not overpaying for earnings and certainly not for cash flow or EBITDA.

    Division prospects:
    Practice management
    I really like this division, it provides essential services to accounting firms and SyncDirect acts as an interface between other accounting applications (of the clients) and data that the firm requires for their records/ATO etc. Much of the software seems to be around automating and streamlining processes (I suggest you look at the APS section of their website). APS will provide a personal cloud for the firm so employees can access all data off mobile devices. I imagine that for an accounting firm to change this software would require some upheaval to say the least. This software is relatively cheap when viewed over a single practice yet it is essential. This division has scalability and as the economy and accounting practices grow over time this division should grow if market share is retained or increased. Though this division is the least exciting it is also the most systemically important for the user and as a result the clients should be fairly captive. Doc management should also integrate nicely with this division.

    Business
    This is the division everyone thinks of when they hear Reckon. This is the accounting software for SMEs and larger. If you wanted to do your own accounting at home for a small business you might use Reckon One. Reckon One provides modules that you can mix and match to suit your needs. This is a cheap and cheerful version of Xero or MYOB. Reckon One is a subscription based model that links your accounts up to the cloud. I have read a few reviews on this and it seems they are generally positive – except for payroll data. This has just been released and this should improve functionality. Still sounds like there are some issues here, for example no Pay Items are preloaded and no integration into BAS reports. I feel Reckon is trying to capture the lower end of the market and this to me seems a viable strategy. Also once a customer is on your product they are captive and prices can be increased slightly. These very cheap entry points have also contributed to the slide in EBITDA. I think this is what the company means when it slates falling EBITDA as a result of moving users to a subscription model. The subscription model has to be cheap at first, particularly as Reckon does not have first mover advantage here. As more SMEs move to cloud based accounting there is strong growth potential for this division. Reckon accounts and Reckon accounts hosted are also in this division and provide accounting software to larger companies. I would love to hear from posters who have more information on this.

    Doc Management
    This nice little division has a couple of products (Virtual Cabinet and SmartVault) that store edocs. This is obviously important for financial documents, but also has applications in a number of other fields such as law. SmartVault was an acquisition from the start of the year and it appears to gel nicely with the rest of their business. Apparently it will be earnings accretive under a low growth scenario. Management has not disclosed a price for this (oh dear!). In my experience if management does not disclose a price it is because as a shareholder you don’t want to know the price. I could be wrong perhaps the vender did not wish to disclose the price. However, in the grand scheme of things this is a small acquisition and should not have much of an impact on debt levels. SmartVault is based in Texas and most of its earnings are in USD. This division has high growth potential as more documentation moves to electronic format. For example it would make sense for businesses in different geographic locations to upload paper docs so they can be accessed securely and efficiently.

    Management
    Management (Clive Rabbie – CEO and Greg Wilkinson – Deputy Chairman) have substantial share holdings. Though not so big as to be as to be in danger of a management takeover. They have been purchasing significant stock after the 2015 report caused the share price to decline. I take this as a good sign.

    Risks
    The Business section in particular is facing pressure from Xero, MYOB and Intuit. All of these companies have more money to throw at development than Reckon and by all accounts are doing a good job. Still I feel Reckon has a good chance of carving out a niche in the SME market.
    Accounting practice software is competitive and there are risks big players will outspend here too, but with the stickiness of business I feel this division is a little more secure to competitive threats.
    Currency risk is an issue for any business with international divisions. nQueue (law firms in the US), Virtual Cabinet(accountants UK) and SmartVault are international. Reckon one is currently being adapted for the UK market. On balance I see businesses that are less exposed to the AUD as a positive and I am actively looking businesses of this type. Around 21% of revenue comes from the US and UK.
    Finally management could make an acquisition that is not sensible or ill timed. This has happened once before during the tech boom.
    I think RKN provides a good risk reward opportunity for up to 10% of my portfolio. I am prepared to take a higher weighting on this than my previous research article for DNA due to risks discussed in the DNA article.

    PS I first became aware of Reckon via Selector Funds Management who write some excellent articles (they may or may not own RKN, but they have been researching it). I often scan fund managers for ideas – though rarely follow their buys as each case has to make sense via my own analysis. Recently Steve Johnson at Forager Funds has purchased enough for a substantial holder notice. Steve has written an article about RKN on his blog that I highly recommend (in fact all his stuff is very good).
 
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