Reckon’s New Lease Of Life

This story features RECKON LIMITED, and other companies. For more info SHARE ANALYSIS: RKN

Run-of-the-mill accounting software company Reckon may be set for a re-rating, brokers believe.

-Reckon reported earnings in line with expectation
-Legacy licensing shackles released
-Upside catalysts
-Corporate appeal

By Greg Peel

Reckon ((RKN)) was founded in 1987 to provide software for accountants, bookkeepers, small-medium enterprises and for personal use. The company republished and distributed Quicken & QuickBooks software products in Australia under a licensing agreement with US-based Intuit. As an early leader in software, Reckon’s share price grew steadily though to late 2011-early 2012, exceeding $2.00, before a long downhill slide began.

MYOB (no longer listed) had appeared on the scene and quickly gained a reputation as being the go-to accounting software provider. In more recent years, Xero ((XRO)) turned up, and has gained its own reputation. Over the period, technology has evolved, most notably into the cloud.

Not that Reckon was lost in the wash. In August 2022, Reckon sold its Accountants software division for an amount which at the time was similar to the market value of the entire business, and paid shareholders a 57c special dividend as a result, leading to a commensurate de-rating of the share price once paid.

In March 2023, the share price was under 50c, and today it’s still under 60c.

Following said sale of its Accounting Practice Management business, today’s Reckon has a business accounting division in Australia and New Zealand and legal practice management software business in the US and UK. It continues to develop cloud-based versions of its products, notes research house MST Access, which it now provides across each of its customer segments.

Its Business Group revenue growth is also expected to come from white labelled products and partner and payments strategies.

While the Business Division continues to provide dependable but modest growth, the Legal Division is still in an investment phase.

Earnings Result

This week Reckon posted second half 2023 results in line with Morgan Stanley’s expectations. There were no major surprises in terms of low-to-mid single digit constant currency revenue growth in both divisions, with a stronger subscription performance weighed down by legacy products in the Business Division and transactional revenue in the Legal Division.

Morgan Stanley sees the removal of legacy revenue headwinds and improved leverage, especially to elevated R&D spend in Legal, as catalysts for a re-rating.

The ability to deliver operating leverage and surprise on free cash flow generation are the biggest driver of outperformance amongst the broker’s technology coverage. Despite being in an investment phase in Legal, Reckon managed to improve group earnings margins while lowering development spend.

This moderation in R&D spend assisted an improvement in free cash flow margins, which drives Morgan Stanley’s target to 65c, up from 60c.

The earnings result was in line with Petra Capital’s forecast while earnings were 4.8% ahead.

In Business, total cloud users declined by -10% year on year, however, this was largely driven by the discontinuation of the free payroll app, Petra notes. Paying cloud users increased by 7%. These impacts underpinned an estimated 11% increase in average revenue per user.

Legal maintained the solid growth rate in subscription revenue seen in the first half. This growth rate was achieved on a relatively stable cost base, while capitalised development costs increased negligibly.

The transition to the Reckon One codebase is strategically significant, Petra suggests, as it should eventually release Reckon from the restrictions of the Intuit licence, particularly regarding its non-transferability. The broker believes this feature of the royalty free licence agreement with Intuit may have prevented corporate activity in the past.

Petra’s sum-of-the-parts valuation continues to imply “significant upside” to the current share price. The broker has lifted its target to $1.10 from $1.05.

Management’s focus remains clearly on delivering continuing steady growth in Australia, MTS Access notes, while driving US Legal to generate high growth from increased penetration in a large market. This supports the longer-term strategy of developing value-creating sales strategies for each division.

The core Business Group delivers dependable but modest growth. However, it remains, in MTS’ view, an attractive target for banks looking to broaden their services and increase their influence.

MTS Access has increased its valuation for Reckon to 88c from 84c, but does not provide a target price or rating.

Petra Capital rates Reckon a Buy, while Morgan Stanley sees catalysts for a re-rating, but for now sticks with Equal-weight, Sector In-Line.

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