Xero reportedly complained at an analyst briefing about the dominance of one broker on the NZX – and NBR understands that broker is First New Zealand Capital.
It seems unlikely, then that FNZC endeared itself to Xero founder Rod Drury any further with its latest research note, issued yesterday, which downgraded Xero from neutral to underperform and set a 12-month target price of $29.80 (from $23.50).
FNZC analyst Tristan Joll acknowledges Xero’s watershed operating profit, dominance in Australasia, big gains in the UK, the potential to monetise add-ons beyond accounting, and solid funding position.
But he adds the stock is over-valued after its recent run-up (even allowing for its post-delisting news dip, shares are still up more than 80% for the year).
“The adoption of more optimistic forecast assumptions – particularly in the UK – still leaves us with a valuation well shy of the current price,” he says.
Lack of US cut-through a red flag
Mr Joll also cautions that “scale in North America is still ultimately required for success.” On Thursday, Xero reported more big gains in North America but off a small base. Its presence there remains modest next to other markets (see table below).
The FNZC downgrade could explain why Xero’s shares extended their losses on Monday and Tuesday morning. In midday trading, the stock was down 3% to $29.77 for a cumulative 11% fall since the delisting news on Thursday morning. Mid-afternoon trading saw buyers finally turn out with the stock up 1.33% to $31.09 for the session.
Earlier, former Xero director and current Xero investor Sam Morgan complained about the lack of “depth” in New Zealand analyst reports and media. That sentiment is very much up for debate but it is clear the most positive sentiment in the present round of ratings has come from across the ditch (where a Sydney-based analyst for Citi upgraded to its Xero 12-month target price to $43.20 and more sceptical in New Zealand (beyond FNZC’s downgrade, Forsyth Barr maintained its neutral rating, noting the “key blemish” of declining average revenue per user).
More aggressive Aussies
Clare Capital managing partner Mark Clare says “We have seen Australian analysts being more aggressive in making assumptions about future performance of both Australian and New Zealand companies … as opposed to some of the New Zealand brokers who definitely have taken a circumspect view of Xero’s growth profile.”
But ultimately, he says Xero’s key reason for consolidating on the ASX is as per its official version: that large offshore funds find it easier to invest in a company listed on one exchange.
Mr Clare thinks Xero’s 10% tumble since Thursday was 100% tied to news of its delisting. He says companies like Xero are always going to follow the path that will maximise return to shareholders, and that will sometimes involve leaving the NZX. However, he says Xero’s departure has been the topic of much debate in the technology investment community over the past week and it will be “very interesting” to see if the local exchange produces any proposals for helping second-tier technology companies.
Earlier, Mr Drury questioned a wave of New Zealand technology companies that gave the NZX a swerve, instead listing directly on the ASX – where most found themselves small fish ignored in a big bond (Volpara has emerged as an exception).
So how big a fish is Xero? One of the biggest. Clare Capital has put together a “Xero Molecule” of metrics across the ASX and NZX (above) that sees the online accounting software company in the top 25% by most measures – although he notes one weak point as it gets larger is CAC (customer acquisition cost).
Overall, Mr Clare says Xero will consolidate on the ASX with strong financials. He pins the share price fall entirely on the move across the Tasman, which will introduce extra costs and currency risk for NZ retail investors.
Related video: Xero chief executive Rod Drury talks to Susan Wood about his company's decision to delist from the NZX.
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