Deutsche Bank: Buy MYOB

Cesar Manso/AFP/Getty Images

Deutsche Bank has initiated coverage of MYOB, rating it a buy and saying the cloud software group is catching up with its main competitor.

“Whilst its origins are in desktop software and it has lagged XRO (Xero), its nearest competitor, in the number of cloud subscribers, our discussions with accountants suggest MYO is improving its cloud offering and catching up,” write analysts Tim Baker and Joseph Kim in a note to clients.

“We believe the large addressable market provides MYO with substantial room to grow despite the competitive environment.”

A short time ago, MYOB’s shares were up 1.25% to $4.04. Deutsche Bank has a $4.40 price target.

MYOB has 1.2 million small to medium enterprise users and 40,000 accountant partners.

Xero has been leading in the uptake of cloud based services, as this chart shows:

However, that could be about to change. The analysts say recent growth rates in cloud subscribers at MYOB and Xero have been close.

Xero grew cloud subscription by 46% in the year to March, compared to 47% for MYOB in the 12 months to December.

“Overall, despite being behind in the absolute number of cloud subscribers, we believe MYO can sustain a similar rate of growth to XRO in the Australasian market, with its extensive accountant network (40,000 accountant partners) likely to be a key driver behind this growth,” the analysts say.

The key players in cloud accounting:

“In our view, the stock (MYOB) is undervalued at current trading levels,” says Deutsche Bank.

MYOB’s EBITDA (earnings before interest, taxes, depreciation, and amortisation) is forecast to grow 9% to 12% between 2016 and 2018 mainly driven by double-digit revenue growth in the small to medium enterprise solutions segment, according to Deutsche Bank.

The company is due to release half year results this Thursday.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.