You are using an older browser version. Please use a supported version for the best MSN experience.

Xero to turn profit from 2020: Morningstar

NZN 24/06/2016 Paul McBeth

Xero will start turning profits from 2020 as it continues to grow its customer base in North America and the UK, says Morningstar.

The research house's fair value estimate for Xero is $21 a share, a premium to the current trading price of $18.50, on expectations the Wellington-based accounting software developer will start making money soon and probably won't have to raise more capital.

Morningstar predicts Xero's annual loss peaked this year, and that it will go on to post a maiden profit of $87.6 million on revenue of $754.1m in 2020. By 2021, profit is seen rising to $147.2m on sales of $923.6m.

"We expect the company to continue leveraging this strong position to expand quickly in other regions, such as the United Kingdom and the United States," analysts Gareth James and Andrew Lange said in a note.

That's slightly slower than local brokerage First NZ Capital is picking, with analyst James Schofield projecting positive operating earnings in 2018 and a bottom line profit the following year. He also has a $21 price target for the stock.

Morningstar's James and Lange said a potential takeover bid by accounting software groups Intuit or Sage is underpinning the share price.

Xero estimated the long-term value (LTV) of its existing subscribers at more than $2 billion as at March 31, based on future cash flows and excluding customer acquisition costs, they said.

The software company's current market value is $2.53 billion, and at Morningstar's target price it would be worth $2.88b.

Xero reported an annual loss of $82.5m in the 12 months ended March 31 on revenue of $207.8m, saying it had enough cash on hand to start breaking even without having to raise more capital.

The software developer has eschewed chasing profits in the short-term, instead spending cash to build a global-scale business. As at March 31, it had built a customer base of 717,000 paid subscribers from 475,000 a year earlier.

Morningstar expects rapid customer growth will continue, and by 2021 it estimates Xero will have 80 per cent of New Zealand's market, 48 per cent of Australia, 21 per cent of the UK and 5 per cent of the US.

image beaconimage beaconimage beacon