05-Feb-2021:  Wilsons Equity Research: Nitro Software Limited (NTO): Initiating at Overweight: Expecting an Explosive Future

Analysts: 

• Ross Barrows, ross.barrows@wilsonsadvisory.com.au, Tel. +61 3 9640 3854
• Cameron Halkett, Cameron.halkett@wilsonsadvisory.com.au, Tel. +61 2 8247 3162

Initiating at Overweight:  Expecting an Explosive Future

We initiate coverage of Nitro Software Limited (“Nitro”) with an Overweight rating and a $3.70 Target Price (+21% TSR). Nitro is a US-headquartered, Australian-listed, global document productivity software company that aims to drive digital transformation. Nitro is well placed to capitalise on the strong secular trend of the automation of business workflows, which includes document management and digital signatures. This medium-term macro trend accelerated materially in 2020 given the volume of employees and customers alike working from home. There is a tectonic shift towards all-things-digital and with ‘the Genie not going back into the bottle’, we expect ongoing, robust demand.

Key Points

• Four Reasons to Buy Nitro –
  1. The expedited migration to digital workflows which will result in increased demand for document management and digital signature services that Nitro offers;
  2. Nitro‘s Productivity Suite, which offers both Document Management and Digital Signatures features, is a differentiating factor from its two dominant, incumbent competitors, Adobe and DocuSign;
  3. Nitro’s Total Addressable Market (“TAM”) of ~US$5.5bn could increase by US$1bn-US$10bn with the Nitro Sign standalone product; and
  4. Revenue upside risk, to be determined by Nitro’s success in transitioning free Nitro Sign customers into paying customers and cross-selling into its existing customers.
• Forecasts & Guidance –
  • We are forecasting FY21e ARR of $40.2m (+45% pcp.), Revenue of $48.2m (Consensus: $46.0m), and EBITDA of -$7.0m (Consensus -$7.5m). Our revenue forecasts reflect strong growth in Nitro subscriptions and our EBITDA forecasts factor in FY21 being a year of continued investment.
• Target Price & Valuation –
  • Our $3.70 target price reflects a Dec year-end FY22e EV/Sales of 10x which is a -44% discount to the average of its global peers, Adobe and DocuSign but a +50% premium to the average of its domestically listed, but global peers, Bigtincan and Whispir. With Nitro’s core business (Subscription) set to encompass ~80% of the revenue mix by FY22e and growing at a CAGR of 43% FY19e-23e, we believe NTO warrants a premium valuation to local peers.

Catalysts & Risks

• Catalysts:
  1. Ongoing acceleration in subscription sales (both new customers and fast migration of perpetual customers);
  2. Pricing traction to reduce the discount to competitors;
  3. Financially and strategically accretive M&A.
• Risks:
  1. Lack of scale in the US and other markets;
  2. Subscription growth not meeting expectations;
  3. unsuccessful and/or ineffective M&A.

Nitro Software Limited (NTO)

• Recommendation: OVERWEIGHT
• 12-mth target price (AUD): $3.70
• Share price @ 04-Feb-21 (AUD): $3.07 ($2.64 on 01-Apr-21)
• Forecast 12-mth capital return: 20.5%
• Forecast 12-mth dividend yield: 0.0%
• 12-mth total shareholder return: 20.5%
• Market cap: $584m
• Enterprise value: $541m
• Shares on issue: 190m
• ASX 300 weight: n/a
• Median turnover/day: $1.9m

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