Reckon Takes Control

This story features RECKON LIMITED. For more info SHARE ANALYSIS: RKN

-Buy-back accretion in 2014, 2015
-Competition more aggressive
-More feedback needed on cloud
 

By Eva Brocklehurst

Accounting software company Reckon ((RKN)) is taking control of itself. The company has signed a selective buy-back agreement to purchase Intuit's 11.45% stake, at a price of $1.85 a share for total consideration of $27.4m. Reckon will fund the share buy-back from debt facilities. The buy-back is conditional upon approval by special resolution of shareholders not associated with Intuit.

Deutsche Bank views the deal as a positive, representing effective use of the balance sheet to generate earnings accretion while maintaining conservative gearing. It removes a potential stock overhang and severs ties to Intuit, which is now directly competing with Reckon. Assuming the transaction occurs in the second half the broker estimates the buy-back to be 3% and 6% accretive to 2014 and 2015 respectively. Outside of this transaction, Deutsche Bank envisages Reckon still retains risks in the execution of its move to a subscription-based model. Hence, the stock is unlikely to outperform in the next 12 months, in the broker's opinion. Deutsche Bank retains a Hold rating.

Morgan Stanley is quite positive on the idea of buying back stock from a competitor, both in terms of the earnings uplift and the removal of uncertainty. Still, the development is only an incremental positive. The issue of holding its market share in a competitive environment which is becoming more aggressive remains a concern. Morgan Stanley retains an Equal Weight rating. Still, it does remove the uncertainty of having a competitor on the register and comes on the back of guidance at the May AGM that signalled trading in the year to date is consistent with consensus expectations.

The bigger debate, Morgan Stanley agrees, is around the ability to shift to a cloud-based model when the competitive environment has also shifted focus to well-funded international players, from the cosy duopoly of the past. Morgan Stanley would like to witness Reckon deliver more on its promise of an improved platform and functionality, amid any feedback that suggests the product is indeed gaining traction.

The delayed launch of Reckon One has meant Goldman Sachs has lowered sales forecasts and increased cost assumptions for marketing and infrastructure expenses. The broker has, as a result, cut FY14-16 earnings forecasts by 5-6%. While awaiting formal shareholder approval of the buy-back before updating further, Goldman estimates the buy-back should be 8% accretive on an annualised basis and includes this in a price target of $2.25, retaining a Neutral rating. The buy-back is a logical initiative, in the broker's opinion, given the expiry of the licence agreement for the distribution of Intuit products in Australia and New Zealand. Reckon will benefit to the amount of an annualised $5.2m in earnings from the cessation of royalty payments to Intuit from February 2014 and Goldman assumes the net benefit in 2014 is $3.5m, given the delays to Reckon One.

Reckon attracts three Hold ratings on the FNArena database. The consensus price target is $2.18, suggesting 1.6% upside to the last share price. The dividend yield on FY14 and FY15 earnings expectations is 4.5% and 5.0% respectively.
 

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