I’ve been putting off posting about my Reckon purchase because the original thesis has changed substantially, and not really for the better. Nevertheless I want to keep this blog transparent and provide a fair record of why I’ve made each investment decision. So let’s get on with it!
Until recently, these spanned across three main divisions:
- Business accounting software (i.e. ReckonOne and Reckon Loans)
- Practice Management (APS Software which has been used by 3 of the big 4 firms)
- Document Management (Virtual Cabinet & SmartVault)
I say recently because Reckon has undergone dramatic changes in the last 6 months. It spun off its Document Management segment through GetBusy Plc, now listed the London Stock Exchange Alternative Investments Market (LSE AIM) and sold its Practice Management segment to accounting software provider MYOB (MYO.AX).
In FY2016 Reckon had Revenues of $97.8 mln, EBITDA of $35.3mln and NPAT of $10.99 mln. A look at the same figures 10 years prior show the company almost doubled revenue and EBITDA but barely increased NPAT. This is largely because Reckon has invested in growing the business and modernising to compete with cloud based offerings from MYOB and Xero (XRO.AX). During this time Reckon also terminated its affiliation with Intuit, from which it on-sold products Quicken and Quickbooks. This significantly impacted earnings.I’ve followed Reckon since 2012, and to be honest have found it a difficult business to value. During this time the way the company has attributed earnings has changed dramatically. The effect of this is that it was hard to look at the different segments and value them accordingly as their underlying composition changed every few years.
Prior to the announcement of restructuring Reckon was trading at around $1.80 per share. It subsequently bounced around between $1.50 and $1.80 per share prior to the de-merger.
Estimating a Valuation
At $1.80 per share the Market was saying Reckon should be valued at $204 mln. I couldn’t get a solid valuation but I estimated Reckon was worth a fair bit more, having finished a period of heavy investment and growth I thought it should be set to start extracting a decent profit from its Revenues and growing these YOY at an acceptable rate, after which the share price would adjust accordingly. For example, paying customers in the Document Management segment increased from < 15,000 in 2011 to 50,000 in 2016 and operated across the UK, US, AUS and NZ. The APS Practice Management arm doubled in size over the same time and the Business segment rose from < 15,000 online users to almost 40,000. Much of the revenue was moving to subscription base and to cloud users. The CEO long talked of the business ‘unlocking’ value, which seemed to me to mean selling off segments one at a time.
I bought shares in RKN toward the end of May, at $1.72 per share.
Since then, Reckon’s demerger provided an In-Spicie dividend of 23 cents per share, an option to participate in the Rights Issue of GetBusy at A$0.48cents per share. Reckon subsequently sold its APS Practice Management segment to MYOB fo $180mln. These actions alone value the complete business at $26mln + 180mln = $206mln, without factoring in the value of the Business Software segment. I couldn’t find NPAT figures for this segment but it represented 27% EBIDTA to the group in FY2016. To me, this suggests this segment could be worth around $100mln, and the entire business might have been worth $300mln. This would have equated to a share price of $2.65. It would be remarkable for Reckon to trade at that price, and the CEO had often said the parts seemed worth more than the whole as value by the market.
As it stands today, Reckon trades at around $1.50 per share and at some point in 2018 will use the $180 from the sale of its APS segment to pay a dividend and reducing debt. At end of 2016 Reckon had around $52mln in long term debts and total liabilities of $83mln. This could leave a sizeable dividend for shareholders:
$180mln – $83mln = $97mln which distributed to 113 mln shares on issue = 88 cents per share before tax.
I can’t be sure how much of the proceeds will be used to pay down debt but it seems reasonable to expect a special dividend after taxes of around $0.50 per share. I believe the dividend would gain the benefit of franking credits.
There are still risks with Reckon. The remaining business is up against giants Xero and MYOB although is focused on the smaller end of the Self-Employed and SME customer base. I use ReckonOne to run the accounts on my own business and with live bank feeds it costs $8.00 p/m. That’s way less than Xero’s super basic offering of $25 p/m and massively less than the $50 p/m Xero charges for it’s more reasonably featured package.
I can see ReckonOne being very appealing to the sole trader and small business owner though they need to do better with their marketing. Xero for example offers a cut of the ongoing subscription payments to users of new customers they sign up, Reckon however, does not or only offers this to Certified Partners (usually accountants). This has probably made it harder for them to keep up with Xero’s wildfire invasion of the Aus/NZ market.
Reckon is moving in to the medium size credit market with Reckon Loans and there could be execution and customer default risks with this strategy.
What’s left of Reckon is also expanding across the UK and there remain risks this remaining segment odes not grow adequately in the face of MYOB and Xero.
Ultimately, this won’t have been a tidy investment. I’ve ended up with an obscure holding of GetBusy Plc on the LSE AIM which I won’t be able to sell until I open an Interactive Brokers account (the AIM is hard to access with brokers in Oz). Further, I could have bought in at $1.15 per share after the de-merger and gained the special dividend and share price increase to boot. Such is the benefit of 20/20 hindsight I had no way of knowing initially. Including the value of the de-merger, I’m currently breaking even.
Full disclosure: (marginally) Long Reckon Ltd. I’m no expert! Do your own research prior to making any investment decision and seek personal and professional investment advice. This post is not a solicitation to buy or sell any stock. Read my full disclaimer.
What do you think of Reckon Ltd? Do you have any experience with any of their products like ReckonOne or Reckon Loans?