Analyst ups Xero valuation, but remains guarded

Forsyth Barr has raised its valuation of Xero by three cents per share to $2.63.

The move followed the online accounting software company’s $20 million share issue and purchase of practice management company Max Solutions for $6 million, both announced Thursday.

Max Solutions is an online job, time and invoice management solution provider.

ForBarr analysts Andrew Harvey-Green and Fraser Hunter said the Max purchase (for $2 million in cash and $4 million in shares would have a positive earnings impact, lifting 2012 ebitda by 2% and 2013 ebitda by 10.5%.

The pair also noted that Xero “once again obtained equity capital with ease and once again the share price reacted favourably - something that is not often seen from NZ listed companies.”

Despite potential dilution, Xero shares [NZX:XRO] rose more than 3% on the news, and closed at $3.03 on Friday.

ABOVE: Xero (in blue) vs NZX50 3-year chart courtesy CapitalIQ. Click to zoom.

There was “more to come” with a supplementary share placement programme, which Mr Drury told NBR could potentially raise another $5 million to $10 million.

Max would help make life easier for accountants (who hold a degree of sway over their clients’ choice of software), thereby assisting Xero in its strategy of “influencing the influencers,” in ForBarr’s view.

The company maintained its hold rating on Xero.

ABOVE: Xero (in blue) vs NZX50 3-year chart courtesy CapitalIQ. Click to zoom.

According to CapitalQ, Xero's Friday closing price of $3.03 gives the company a market cap of $274 million. The loss-making company recently said it now had committed revenue of $1.75 million a month, or $21 million a year. It has now target date to break even. Chief executive Rod Drury told NBR it was in shareholders' long term interest to focus on market share growth opportunities and developing Xero's software at this point. 

ForBarr was “cautiously optimistic” the online accounting software company could hit its targets, but noted that the company was still difficult to value and a high risk investment.

“The current share price is already factoring in significant growth and the downside risks should not be underestimated.”

Analysts for Craigs IP and FNZC told NBR they did not cover Xero.