MYOB shares are reasonable at $3.50 each, according to this independent analysis of the IPO

MYOB CEO Tim Reed.

Shares in accountancy software player MYOB are fair value at $3.50 each, according to analysis of the company’s float plans by research house Morningstar.

The number falls within the indicative price range of $3 to $4 per share for the float due next month.

The company, is seeking raise $831.7 million to $833.8 million from an IPO, is a fierce competitor to Xero and Intuit.

Bain Capital is not selling shares into the IPO and will retain a 57% stake. The market capitalisation will be between $1.9 billion and $2.258 billion.

“We prefer to buy shares at a discount to our fair value estimate but would only consider MYOB overvalued at a 10% premium to fair value, or AUD 3.85 per share,” Morningstar says.

Morningstar says accounting software providers have many attractive attributes, including high customer retention rates and earnings growth opportunities as the industry transitions to cloud-based software as a service.

The research house says it expects MYOB to continue to produce peer-beating earnings.

“Historically, accounting software users have shown little inclination to switch providers,” Morningstar says. “The inconvenience and operational risk of doing so has tended to outweigh the relatively modest potential benefits. The coming transition to cloud-based products offers competitors a rare window of opportunity to steal market share before accounting software once again becomes entrenched in client business processes.”

Morningstar says MYOB’s 65% market share gives it a key strategic advantage, as accountants usually recommend their own software provider to clients. It has 1.2 million users.

MYOB was listed on the ASX in 1999, with an initial $120 million market capitalisation. In 2008, the company was acquired by Archer Capital and HarbourVest Partners for $460 million. In 2011, MYOB was sold to Bain Capital, reportedly for around $US1.3 billion.

“Since the Bain acquisition, we estimate MYOB’s earnings have grown by around 40%, and its cloud business has grown significantly,” says Morningstar.

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