06-Apr-2020: Ord Minnett: Xref Limited: Xtracting costs
Not sure if that link will work; it will probably depend on whether you use MS Outlook or not; however the main points are that OM have lowered their TP for XF1 from 25 cps to 21 cps, and maintained their "HOLD (Higher Risk)" call on Xref.
Excerpts:
XF1 released a mixed 3QFY20 result, with costs reduced meaningfully but sales not regrowing as much as we would have liked. XF1’s business model is dependent on market sentiment and employers hiring, making global uncertainty caused by COVID-19 a pertinent issue. Coming out of this crisis, XF1 is uniquely placed to play an important role in re-hiring, but in the meantime it will likely see a slowdown across all but its essential service clients. Having pared back credit sales in FY20, we expect an improvement in FY21 as the economy gets going again, and a more meaningful uplift in FY22 to follow. In order to see the business through to FY22, however, we anticipate additional capital being required. In addition, prolonged exposure to greater consumer and market uncertainty is likely to further deplete XF1’s cash reserves in the short-term. We maintain our Hold
recommendation and reduce our price target to $0.21.
Steps in the right direction
XF1 has continued to cut costs over the past quarter, with more anticipated in the fourth quarter. We view this favourably given XF1’s current market capitalisation and likely need to raise capital in the next 12 months. In addition, management reaffirmed guidance that XF1 will reach cash flow break even in 4Q20. Given the cost base reduction of nearly $2m over the final two quarters, we feel this a more achievable that previously. XF1 also note that ~35% of its customers are considered essential services (e.g. health care) and have seen an uplift of ~55% over the last two weeks. This is a positive as it will help alleviate the strain of the remaining customers which have declined ~42%.
Capital raise coming
On our numbers, we still anticipate two capital raises are required for XF1 over the next two years. Whilst cost reductions are positive, they have not been sufficient to outweigh XF1’s credit sales outlook in the short-term.
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