MYOB turns around

Revenues, which had collapsed by 35% in 2001, recovered 20% to $75.8m in 2002 and, while the 2002 profit result shows only a slight improvement, to $5.4m, cash flow was a healthy $12.7m compared to a cash outflow in 2001. That's helped to keep the balance sheet strong with over $25m in net cash.

New customers

Perhaps more encouraging, though, is how the revenues were earned. In 2002, 45,000 new customers bought MYOB's accounting software products. That's encouraging because many observers had thought there was no growth left in this area after many small business owners bought accounting software packages prior to the introduction of the GST in July 2000.

Another interesting point is the 2002 revenue split. Previously, more than 60% of MYOB's revenue came from the sale of new products. In 2002, only 34% of revenue came from new products, with 50% from services and support and the rest from product upgrades. This shows the value of the company's installed base of users and a move away from a reliance on new product sales.

Another reason for the strong result is that the majority of sales are derived from Australia (81%), followed by New Zealand (11%), USA (7%) and the rest of the world (1%). This gives the company some insulation against the rest of the world's economic woes (providing we continue to hold up) but it also offers an avenue for growth in the longer term.

In November 2002, MYOB launched a new service for its 300,000 Australian customers. Users of the service will be able to give their customers a range of payment options (eg B-Pay, credit card, post office etc.), in much the same way as big companies like Telstra . This sort of payment method has not previously been available to small businesses but would be extremely convenient for their customers.

Service users will have to pay $299 upfront, plus additional monthly and individual transaction fees. Management is aiming to have 10% of its customers using the service within three years, which could add up to $5m in pre-tax profits during this time.

Potential

There's plenty of potential for this new business and the downside is limited, thanks to the relatively low ongoing costs. Perhaps this is why management has been talking about a 50% increase in pre-tax profit for this year.

We've been anticipating this improvement in MYOB's fortunes, recommending a speculative buy up to 75 cents in issue 113/Oct 02 (Speculative Buy - $0.67).

At $0.79, MYOB is being valued at $199m, which is pretty hefty compared to last year's revenue of $76.8m and puts the stock on a steep PER of 36.

But MYOB has a very strong brand name and, if its management team can keep delivering, it should be able to justify a higher share price.

In the end, though, value investing is all about giving yourself a margin of safety and that has all but disappeared with this stock. We recommend you now HOLD FOR THE UPSIDE.