The Human Resource (HR) department was invented over a century ago as industrialisation took place and organisations grew larger. The current popular term for this role within an organisation is “Human Capital Management” (HCM).

The HCM function within an organisation ranges from functions such as payroll, rostering and leave management, to team building and training that foster a person’s creativity and unique contribution to a firm. A high functioning HR team within an organisation can directly and laterally increase shareholder value.

In this wire, we describe the software technology used by human resource departments, the growth in the Asia Pacific market for this type of software, and look at one inexpensive exposure to the thematic listed on the ASX.

Why Human Capital Management (HCM) software?

Over the past few decades, technology has considerably streamlined HR department capabilities. HR departments within large organisations have had access to HCM software that has enhanced their reach and effectiveness.

Despite the benefits of HCM software, its historical penetration rate has been low. Primarily because they were expensive and only available to large corporations.

With the advent of Software-as-a-Service (SaaS) technology, lower cost HCM software has been developed. HCM software is now available to a larger market – solving human resource problems faced by organisations of all sizes and complexity.

HCM Software Interface

The payroll component of the human resource department

Payroll is one of the most important functions of an organisation. While at face value it is the simplest of HR functions, it is the most important. It is one of the core infrastructure components of a corporation, and necessary for compliance. It is a high trust role, there can be no execution errors.

HR departments of large organisations have used outsourced payroll processors for decades. With the advent of low cost HCM software, payroll companies can deliver a greater scope of HR services – including recruiting, onboarding, rostering, performance monitoring and training.

With HCM software automating and streamlining an array important but burdensome functional tasks the HR department can focus directly increasing shareholder value. The human resource department can spend more time on the culture and talent management within a firm.

The Competitive Landscape

The size of the global HCM software market is substantial, estimated at US$25 billion and growing at 15-20% per annum (1). This growth is a function of HCM software offering a broader range of services as well as large corporations replacing old systems.

While the market is large and growing strongly, it is competitive. The major legacy HCM vendors including SAP, ADP, and Oracle continue to control ~25% of the market (2) but are losing share to new cloud-based software companies (3). The prize for a customer win is significant, because once a corporate chooses an outsourced payroll provider, the average customer remains with the provider for circa 10 years (4). Slow to join, slower to leave.

To highlight the growth in HCM software industry, we have created an index below of the five largest players in the sector – including ADP, Workday, Paylocity and Paychex. The HCM software sector has nearly tripled the performance of the US S&P500 Index over the past five years.

Why Asia Pacific?

The fastest-growing region for payroll software is Asia Pacific (5) because it has the highest corporatisation growth rates driving HCM software demand. Despite this growth, many of the major US and European based companies have neglected the region, largely due to its complexity. The Asia Pacific region is not homogenous – it comprises 45 countries, with vastly different cultures, regulations and currencies.

How to gain cheap exposure to core business infrastructure in Asia

Paygroup (PYG) is an ASX listed company with a market capitalisation of approximately $50 million. The company is a leading provider of payroll software solutions for multinationals and workforce management companies operating in the Asia Pacific region.

PYG are entrenched in the business infrastructure of its Asia Pacific corporate customers, performing the most critical processes for them - including payroll and treasury services. PYG is a substantial operation, developed over 14 years, operating in 26 countries and across all major industries.

PYG has a low volatility and dependable cashflow profile – a function of a 95%+ customer retention rate and multi-year contracts. In addition, PYG is enjoying double-digit earnings growth rates in a market that is large and growing. Despite these attractive economic features, PYG trades at a deep discount to its listed peers on all relevant valuation metrics.

A quality company with an entrenched competitive position and recurring income would normally command a price earnings (PE) multiple at least in that of the Australian small cap market (circa 18 times earnings). Curiously, PYG trades on a PE multiple of approximately just 10 times. This valuation discount is difficult to reconcile particularly when there are numerous earnings growth drivers that may allow PYG to grow earnings at a double-digit rate over the medium to long term. We discuss these growth drivers.

PYG’s Four Growth Drivers

Key Driver 1 – Organic Growth

PYG have a proven ability to grow organically due to its exposure to fast growing Asian economies, as well as the ability to win deals versus larger competitors. PYG’s scalable business model allows additional clients to be added with little further investment in its operating platform.

Key Driver 2 – Acquisition based earnings upgrades

PYG is likely to generate earnings upgrades from acquisition-based growth. For example, PYG recently acquired a HCM software company called “Astute One” that saw earnings upgrades of over 20%. This was paid for 100% in Scrip. PYG are monitoring many companies like this. PYG has the equity market listing, organisational infrastructure and management to identify and execute these acquisitions.

Key Driver 3 – Global Partnerships

PYG is increasing its Asian market share through partnering with leading North American and European payroll providers. It is significant that major corporations partner with PYG to do the Asian component of HCM for them. It demonstrates the complexity of the market and the significant competitive position of PYG’s business.

Key Driver 4 – Efficiency Gains from Scale

PYG has invested significantly in its technology infrastructure during the past year and it is able to handle significant increases in payroll volumes without the need to employ further staff. PYG is likely to enjoy further efficiency gains, assisting with operating leverage.

Valuation Comparisons

We have highlighted that PYG trades on a substantially lower price earnings (PE) multiple than the average emerging company. This anomaly is even more pronounced given the four potential growth drivers we have highlighted.

To highlight the anomaly, we compare PYG’s valuation metrics with other companies that operate in the same sector and have similar potential growth characteristics.

On a forecast fiscal year 2020 earnings basis, PYG trades at an 80% discount to other listed HCM software providers. These comparable companies trade at an average forward PE multiple approximately 50 times.

For a comparison closer to home, we can compare PYG to ASX listed peer Elmo Software (ELO). ELO is an Australian HCM software company that has a market capitalisation of nearly $600 million – ten times that of PYG. Amplifying the valuation anomaly is that ELO is not forecast to generate profits for another three years.

Why is PYG so cheap?

PYG trades at a deep discount to its peers yet has growth is as promising as the best of its competitors. We think the explanation of the anomaly is twofold.

Firstly, there is a lack of research from brokers on the company. Investors are simply unaware of PYG’s quality characteristics nor growth potential.

Second, PYG is a relatively small company which means it has less than average liquidity. Some investors baulk at this, just in case they need to sell in the short term. But for investors that can hold with a genuine long-term time horizon, this should not be a constraint – because it is a potential source of investing edge.

" Our long-term time horizon, coupled with our patient capital, is a sustainable competitive advantage that is very difficult for many other market participants to duplicate.” ~ CT Fitzpatrick, Fund Manager at Vulcan Value
"The inability of so many investors and managers to invest with a long-term horizon creates the opportunity for time arbitrage - an edge in an investing approach that requires the commitment to long-term holding periods.” ~ Joel Greenblatt, hedge fund manager at Gotham Funds

It is important to note, that despite its relatively small market capitalisation, PYG has seven institutions on its register. An indication of the quality of the company and its growth prospects.

In summary

PYG is a low multiple company that can drive earnings at a double-digit rate over the medium to long term. We would expect PYG to experience a re-rate over the coming 12 months as the market becomes more aware of the company and its strong growth prospects

Access the full investment summary

Lucerne Investment Partners provide investment summaries on each of our company investments. You can access the PayGroup Limited Investment Summary by clicking here

(1) Morgan Stanley and IDC estimates

(2) Goldman Sachs

(3) Credit Suisse, January 2020

(4) International Labour organisation, Frost and Sullivan

(5) International Labour organisation, Frost and Sullivan

Disclaimer: Lucerne Australia Pty Ltd, its affiliates, employees and/or clients may hold one or more of the stocks, securities or investments reviewed in the above article.


I found this review very informative, thanks. In particular, your analysis seems to overweight business environment v. adaptive business model, and underweight current sharemarket fundamentals. This seems to expose the value gap/lag between sharemarket and business environment performance. You also cover the obvious risk re liquidity from a sharemarket perspective. If liquidity is low and the sharemarket does want to close to the gap, the price would rise significantly in the short term. Those new owners would then have new temporary liquidity from like buyers at higher prices, until there is a negative catalyst. Will watch with interest, thanks!

Franck Neron-Bancel

Great analysis!

Adrian Lee

Not sure how you're getting a P/E ratio when the company is making a loss.

Paul Terrill

This article appears to contain a number of significant errors. PayGroup Limited is reporting losses and this is unlikely to change in the short term. It doesn’t have a PE of 10 and isn’t trading at a significant discount to its peers.

Tim Hannon

Thank you Paul and Adrian for yourobservations regarding Paygroup's earnings generation and the consequent forward P/E ratio it is trading on. When we undertake valuations we seek to assess the future earnings trajectory of a company on a normalised basis. PYG's current run rate revenue, and the Astute acquisition see the company moving to strong profitability, hence the low forward price earnings ratio we forecast it is trading on. As always, there are risks to forecasts, but we have spent a lot of time trying to understand the company's earning drivers, and are confident that the company can deliver the required future earnings.