PayGroup Limited enters into Scheme Implementation Agreement with global payroll company Deel, Inc. and Deel Australia Holdings Pty Ltd

• PayGroup Limited has entered into a Scheme Implementation Agreement with Deel, Inc. ("Deel") and Deel Australia Holdings Pty Ltd ("Deel Australia") under which Deel Australia will acquire 100% of PayGroup shares for a cash offer price of A$1.00 per share1, via a scheme of arrangement (“Scheme”)

• Deel is a leading global compliance and payroll solution with a presence in over 150 countries servicing more than 8,000 customers

• Cash offer price represents a 174.0% premium to the last closing price of $0.365, and a 172.4% premium to the 1-month VWAP $0.367

• The PayGroup Board unanimously recommends that shareholders vote in favour of the Scheme

• If approved, the Scheme is expected to complete in October 2022

I am a little disappointed this one never got its opportunity to play out. PYG had just hit its inflection point where all the hard work of acquiring, integrating and selling had been done and over the next 12 months was going to enjoy a mighty re-rate as the cash flowed in.

At $1.00 a share, the offer is just too good to turn down, and it will fly through. In these dark times it’s nice to occasionally get an unexpected bump to performance!

The company had been on my radar for months and I decided to jump in when they gave FY22 ARR Guidance of $37M.

The stock’s been sliding downwards since listing in 2018 from dilution and margins that are not as interesting as other pure Saas players. This is because they are mainly a Payroll Outsourcing (70% of revenues) rather than HCM (30% of revenues). This is exemplified in how a business like intelliHR is valued (~20X sales) vs Paygroup (~ 1.7X sales). So expectations must be aligned to their operating model, but I believe there is room for improvement in their margins as they continue to grow markets and customers. The biggest player in the industry is ADP, a mammoth 100B company that is value at ~6X sales with a PE ~30. 

Paygroup’s growth (both organic and with acquisitions) has been very impressive. $7M in ARR in 2017 at time of listing and they gave guidance of $37M for FY22. Currently on MC of $44M, and P/S ratio of 1.6, seems very cheap for such growth. 

In my view the biggest risk is that they remain in this “so close” category where they continue to grow the top line, but they dilute too much and bottom line doesn’t change enough. If that happens investors might never see the value in the company. 

I think this risk is mitigated by an impressive leadership team that are nearly all ex-ADP. I’ve seen the CEO and the Chief Sales Officer present 3 times now and like their style. They seem like great operators and I’m banking on them to make it happen. 

It’s been referenced here before, Andy Crebar has done a quality deep dive in the company. Link: https://www.andycrebar.com/p/paygroup-deep-dive

I forget which straw contributor posted about andy crebar's newsletter, but whoever it was "thank you".

For poeple intrested in SaaS companies listed on the ASX, I couldnt recommend him highly enough. He has a newsletter that one can subscribe to. I think you can just check it out without subscribing.

Here is his latest offering on PYG

At some point it would seem likely that he will launch a service or start charging, the quality is worth it.

Anyway, back to PYG, I was convinced enough, on a value basis, to buy a small parcel today. As he points out, the multiple is ridiculously low (EV/ARR ~=1x, for comparison IHR is on a valuation of 11x - it is growing at quite a different mutiple however) and the underlying organic growth  in ARR is reasonable enough @ ~25%. So there is a disconnect between what the market thinks is acquisition based growth and what is also organic growth. The dilution from cap raises has been outperformed by the improvement growth.

If I could offer a couple of areas that I do not think have attracted enough attention (and lets face it this guy is way better than me at this shit) - it would be these:

• the payback period is crappy. He pointed this out, but we should be looking for companies with <12 months for best-in-breed. PYG is 24months - and thats from pretty tortured data. It might be worse.
• Gross Margins are shithouse at 50%. I know that is great for most  companies, but for SaaS companies, it needs to be a lot higher to justify high multiples. Fortunately, PYG dont have a high multiple!
• The supposition that margins will improve. This is a two-edged sword. Firstly, they have outsourced much of their sales with a partnering program. So in the short term, the CAC will reduce significantly and margins should improve (they dont need to pay for lots of expensive sales staff to acquire new customers). Long term, these middlemen will be taking a cut, reducing the potential for really high margins. Realistically, given the cash balance, acquistion and dilution history, this seems like the correct option to take. But margins are never going to be up in the high 70s or 80s 

Global technology leader joins PayGroup

•  Appointment of Jerome Gouvernel, a US-based technology leader with over 25 years global experience in product and technology, as Chief Product Officer for PayGroup
•  Mr Gouvernel was a senior executive at ADP, a >US$75bn global online payroll and workforce management solutions leader, and previously led ADP Product Incubation Venture and was Chief Technology Officer of ADP’s international employer services division
•  Proven track record in product development, management, and commercialisation of payroll and HCM platform technology across key global markets

PayGroup FY21 Sales Update Record $8.2m in new contract sales for FY21 – a 200% increase PCP, and 149% more than all of FY20

? Total Contract Value (TCV) of $8.2m signed in the nine months to 31 December 2020 (Q1-Q3 FY21; 200% increase PCP - $4.1m FY20)

? $2.8m of TCV signed in Q3 FY21 (a 115% increase on PCP – $1.3m in Q3 FY20) ? Continued record sales growth for SwaS, SaaS and Treasury Services

? Strong momentum exiting FY21 and entering FY22 – over 115 new client entities signed during the nine months to 31 December 2020, and further development supported by strongest sales pipeline

Key Takaways:

1) 3rd consecutive quarter of positivce cashflow, generting arounf $600k of operating cashflow excl. Grants).

2) Reported record contract wins, adding $1M in ARR , or about 5% in ARR this quarter. 

3) Reported 114% revenue growth year on year, mostly due to acquisitions.   

4) Management anticipate strong demand to continue, so may expect 5% ARR growth per quarter going foward.  Looks to be on track for $19 M revenue, and $2-3 M profit.  

Summing it up, Paygroup have a lost of strong competition, so will really need to do well to accelerate growth.  Growth has mostly come form acquisitions, so look more like a software roll up story rather than an organic growth story.   

However, it does look relatively inexpensive at this valuation. 

Disc - I hold a little

Paygroup has reported the acquisition of Malaysia based TalentOz for consideration of $1.2M (with $0.5M earn out in 12 months).  Acquisition paid for predominantly in script, which is a positive.   The acquisition was on a multipel of 1.7x SAAS revenue, which seems cheap but also sub-scale.  

Talent Oz is highly complimentary, adding additional platrom capabilities, including Learning & development, Performance Management,  career management.  Talent Oz has been growing at a CAGR of 170% over the past 3 years.   

Look out ELMO. 

https://www.asx.com.au/asxpdf/20200430/pdf/44hczdv93wtfd8.pdf

Highlights

Operating cashflow surplus of $1.8m in Q4 FY20 (vs $44K in Q3 FY20 prior to one-off costs)

FY20 Annualised Recurring Revenue1guidance of $17.5m reconfirmed, representing growth of 108% on FY19 ($8.4m)

Cash receipts of $4.4m, representing growth of +143% on Q3 FY20 and +128%2 on Q4 FY19 ?Record $5.5m of Total Contract Value (TCV) won in FY20 (+12% from FY19 of $4.9m) with $1.4m of TCV won in Q4 FY20

Recent contract wins highlight significant tailwinds as PayGroup benefits from acceleration in outsourcing, adoption of HR technology and online workflow

Closing cash and cash equivalent balance $2.0m, up from $1.5m at end of Q3 FY20, and debt free ?Strong contributions from Astute, Global Partnership Program & Treasury Services. Expected to deliver further growth in FY21

$1.5m of cost synergies and savings identified, expected to enhance PayGroup’s growing cash balance, with benefits set to materialise with immediate effect from Q1 FY21