A few investors have noticed Forager’s recent sale of our substantial holding in Reckon (RKN). We will provide more details in our September Quarterly Report, but to head off a few questions we have been receiving, our rationale can be summarised into four reasons.
First, the spin-off of Reckon’s document management business has eroded value. Now called GetBusy, the business has been separated from the rest of Reckon. It will start trading on London’s AIM exchange this Friday. It is either difficult or impossible for Australian shareholders to own the shares. The best of some bad options was to sell Forager’s holdings into a bookbuild, where we received roughly $0.16 per Reckon share. This rapidly growing part of the business was pencilled in at $0.30-$0.40 per share in our valuation.
Second, the management incentives here feel skewed. Reckon founder Greg Wilkinson, CEO Clive Rabie, and his son and COO Daniel Rabie are underwriting a rights issue for GetBusy. Greg and Clive are directors and large shareholders, while Daniel will become CEO of GetBusy. They have a clear incentive to underwrite the issue at the lowest price possible and will end up owning a larger percentage of GetBusy than they do of Reckon. One can’t help but wonder if they are laying the groundwork to move on from Reckon.
Third, while management are running around the UK drumming up interest in GetBusy, Reckon’s Australian business is under assault. US giant Intuit recently added its cloud-based Quickbooks product to an already competitive Australian market dominated by Xero and Myob. In a recent results update, Intuit claimed it already had more than 50,000 online subscribers in Australia, already dwarfing Reckon’s 39,000. Reckon used to distribute Quickbooks in Australia. Its customers are familiar with the name and are surely the main target of Intuit’s marketing expenditure.
Much of Reckon’s spend on this part of the business has been tagged as “new business initiatives” and excluded from underlying earnings. If they want to compete, the spend needs to be permanent.
What is APS worth?
Finally, most importantly, we have lost confidence in our valuation of the Practice Management division. This is the part of the business that we had been using to underpin the downside valuation of the entire Reckon business. The main product, APS, is core software for a significant percentage of Australian accounting firms, apparently including four of the top five.
Unpicking this part of the business isn’t easy. Management change the divisional allocation of businesses every year. For the most part, these changes seem to have resulted in propping up the growth of Practice Management.
Our unpicking suggests the APS part of the business – the piece worth a strategic premium – might represent little more than half the Practice Management division’s revenue. The rest, mostly law-firm billing software nQueue Billback, doesn’t deserve the same multiple as APS.
None of this is terminal. Reckon’s current price compensates for a few sins. The customer base is valuable and those currently paying software subscriptions will likely hang around longer than most people think.
Throw in a loss of confidence in management, though, and it adds up to a significant erosion of our margin of safety. Reckon will be navigating its many challenges without us on board.
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Starting Forager Funds in 2009, Steve has grown the business to over $370m of funds under management. Offering an Australia and Global equity Fund, Steve focuses on long-term value investing of unloved and undervalued companies.
Is this something ASIC should look at? i.e. Management feathering their own nests.
Great analysis, thank you.