It's pretty rare that a pending initial public offering (IPO) generates a huge amount of excitement, but the float of MYOB Group Ltd's shares in May is bound to do just that. The accounting software provider will be valued between $2.3 billion and $2.7 billion which will make it the biggest float since that of Medibank Private Ltd (ASX: MPL) late last year.
The shares will be offered to retail and institutional investors at a price between $3 and $4 each and you can expect there will be plenty of mum and dad investors eager to get their hands on their fair share. However, before you commit your hard-earned savings to the rights to some of the company's shares, there are a few factors which you should seriously consider…
The Pros
- As was the case with Medibank in November last year, MYOB could attract an enormous amount of attention from investors. Investors who participate in the IPO could make a very nice paper profit early in the game.
- As is the case with many software providers, MYOB is protected by high costs of switching providers, leading to high retention rates. According to its prospectus, its SME (small and medium enterprises) user retention rate grew to approx. 81% in the 2014 financial year, up from 78% in 2011.
- MYOB has set a target payout ratio of 60% to 80% of net profit after tax and amortisation (NPATA). This would indicate a dividend yield of 2.8% to 3.3% to June 2016.
- MYOB has traditionally provided desktop-based accounting software but is making significant investments to develop its cloud-based services offering. The company said that "67% of new clients (are) choosing cloud products" while many of its non-paying desktop users are also expected to switch over to the cloud, which could help generate significant earnings growth.
The Cons
- Rather than being provided with an exact price per share, investors have been given a range of $3 to $4 while an exact figure will be provided on 1 May (after applications for stock have closed). That means that investors could pay $3 per share (if demand for the stock is low), or 33% more if demand is high (I would expect the price to be at the upper end of the range provided). Understandably, most investors would prefer to know exactly what they're paying for before paying for it.
- MYOB has grown strongly under Bain Capital, but it faces some strong competition from the likes of Reckon Limited (ASX: RKN) and XERO FPO NZ (ASX: XRO). Xero, which is a pure cloud-accounting software provider, is quickly gaining market share and could certainly leave MYOB behind in the coming years.
- MYOB has also come under heavy criticism from Xero which claims that it has overstated customer numbers whilst also neglecting to mention how many cloud-based customers it has in New Zealand. As highlighted by the Fairfax press, two of MYOB's founders now sit on Xero's board, while Xero's CEO Rod Drury claims that MYOB has falsely positioned itself as a fast-growth cloud business to give Bain Capital a good exit strategy.
When a company the size of MYOB announces its plans to list on the securities exchange, it's certain to attract an enormous level of interest from the market. As exciting as the MYOB IPO might be however, it's very unlikely that I'll be taking part in the float.
As it stands, I already own shares in MYOB's rival Xero based on the belief that the pure cloud-accounting software provider could be an even more powerful force in the future, even though it is still operating at a loss right now.
