More than one-fifth of all SMSFs administered on Class Super, and Class products are also used to administer investment portfolios held by non-SMSF entities such as companies, trusts and individuals.
One of the undoubted success stories of the Australian financial services industry has been the self-managed super funds (SMSFs). In 1994, just over 70,000 SMSFs were operating, holding $12.1 billion in assets. There are now more than 600,000 SMSFs, holding $650 billion in assets, the largest single chunk of the nation’s superannuation pool.
The growth of SMSFs has given rise to a whole new industry, and this is where Class Limited (CL1) operates. Class develops cloud-based software solutions for the Australian wealth accounting market, specialising in software-as-a-service (SaaS) administration solutions that automate manual workloads, driving high levels of processing efficiency and scalability.
Financial advisers, wealth managers and accountants are the target market: Class’ products streamline the administration of investment portfolios and represent a highly automated and cost-effective solution for these professionals. More than one-fifth of all SMSFs administered on Class Super, and Class products are also used to administer investment portfolios held by non-SMSF entities such as companies, trusts and individuals.
Class’ software integrates real-time data feeds and facilitates collaboration between SMSF trustees and their professional advisers. It allows accountants, administrators, advisers and auditors to access a data system as their source of truth, where all functions regarding an SMSF can be carried out and recorded.
The result is a classic case of finding a “pain point” in your potential market, and solving it. Using Class to automate certain processes has saved these professional hours – even days – of manual work.
The product suite is as follows:
- Class Super – the leading cloud software for administration of SMSFs. Used by accountants, super fund administrators, financial advisers and auditors.
- Class Portfolio – the company’s non-super product, launched in October 2015: cloud-based software for streamlining investment portfolio accounting, administration and reporting. Used by accountants, advisers and investors.
- SMSF DataFlow – a specialist software solution built for SuperStream, the data and payment standard introduced as part of the government’s Stronger Super initiative, introduced in July 2014. SuperStream was designed to streamline and standardise the way in which employers pay their employees’ super contributions, and provide employee information to their super funds: SMSFs are required to receive employer super contributions using the SuperStream data and payment standard. To comply, every SMSF that receives employer contributions needs an electronic service address (ESA) and the software to receive their SuperStream data.
Class has also partnered with other providers that it considers to be best in their fields, to automate the supply of additional services relevant to SMSF administration and wealth management. This ecosystem includes audit, actuarial, financial, legal and insurance products and service providers. Class’ software now integrates with more than 40 partner product and service providers, to provide streamlined services to SMSFs and other portfolio administrators.
Established in 2005, Class listed in December 2015 after raising $29.9 million through the issue of shares at $1. The shares jumped to a 41% premium, and kept going, to a peak of $4 in 2016.
On listing the company was capitalised at $121 million, but it has more than tripled that: with the shares at $3.02, Class is valued at $353 million.
Last financial year, to 30 June 2016, Class lifted revenue by 45% to $22.7 million, and boosted net profit by 53%, to $5.2 million. (This would have been $5.8 million had it not been for the expenses of the initial public offering). The company paid a dividend of 4 cents a share, unfranked.
For the first half of the current financial year, to December 2016, revenue rose by 31% to $14 million, while net profit grew by 28%, to $3.6 million. The share market liked what it saw: Class shares jumped almost 17% on the release of the interim numbers.
That was after a December-quarter trading update in January – which revealed a record quarter and six months for Class’ number of billable portfolios – jolted the share price 11% higher.
This record increase in billable portfolios, with 17,775 added in the half, largely drove the interim result. At the end of December, Class was earning fees from 130,216 portfolios, including 127,806 SMSFs, on the Class Super product. That is more than twice the number of billable portfolios the company had on listing. Class now handles 21.7% of all SMSFs.
As of the quarter ending 31 December 2016, Class is now paying fully franked dividends: an initial interim fully franked dividend of 1 cent was declared earlier this month.
Like a lot of professional services, the administration and reporting for SMSFs is moving from the desktop to the cloud – and Class is leading that move. Tools like Excel and generic general ledgers no longer fully cut the mustard. The cloud market had increased to 28.2% at 30 June 2016, with Class’ share of the cloud market rising to 68%. Class’ growth in FY16 accounted for more than 80% of the increase in the cloud market. And according to the Investment Trends 2016 SMSF Accountant Report, 23% of accountants intend – or say they are very likely to – change to the cloud this year.
And when the business gets to the cloud, it tends to stick there. Class’ retention of billable portfolios is running at 99.8% as of the December 2016 half: this high retention rate underpins a strong recurring revenue stream, with annualised committed monthly revenue (ACMR) at 31 December 2016 of $28.25 million. (However, it should be stressed that AMP entities make up 7.2% of Class’ ACMR, and these AMP-administered funds are expected to be moved off Class by November 2017, to an AMP platform).
There is also strong potential for cross-selling Class Portfolio: the company says almost 70% of existing clients surveyed are potential Class Portfolio users, and 24% of SMSF subscribers have started using the software.
The changes to superannuation legislation made by the government in November 2016 will probably cut the relative importance of the SMSF sector, according to research firm DeXX&R: the firm says cuts to concessional and non-concessional caps for super contributions under the new system will make SMSFs less attractive.
From 60% of funds backing retirement income in 2016, DeXX&R projects SMSFs’ share of retirement income assets at 46% in 2026, when it expects the SMSFs to hold $609 billion in retirement income assets. At the same time, it expects SMSFs to hold $18 billion in accumulation funds, or 9% of accumulation assets; compared to 14% of accumulation funds in 2016.
But the beauty of Class’ position is that it captures the things that every SMSF has to do, every year, in terms of preparing accounts, having these audited, and filing a tax return. The new superannuation tax regime introduced last year has increased the complexity of these matters, but given a fair bit of certainty to accountants, advisers and administrators on what is required – however, it remains a relatively onerous burden for SMSF trustees, and even on the professionals they use to handle it.
For this reason, Class represents a classic growing niche business. The analysts that follow the stock see earnings per share (EPS) rising by about 42% this year, to 6.6 cents (from 4.6 cents in FY16), and surging again in FY17, to 8.3 cents. From 3 cents last year the dividend is expected to rise to 3.5 cents this year, and to 5.4 cents in FY18.
This means that Class is priced at an eye-watering price/earnings (P/E) ratio of 47 times consensus forecast FY17 earnings, and 37 times for FY18. But to a large extent, the growth opportunity justifies that – although if the expected earnings growth fails to come through, the Class share price would deflate drastically, as many of its growth-stock peers before it.
Analysts like the look of Class for upside: on FN Arena’s collation, the consensus target price is $3.56, representing 17.9% upside from the current price of $3.02. Thomson Reuters reckons the analysts are even more positive: its consensus target price is $3.75.