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Microcap watch: is the PayGroup share price worth $1.05?

We examine why analysts at Canaccord Genuity Australia are bullish on ASX-listed PayGroup.

PayGroup Source: Bloomberg

PayGroup – listed on the ASX under the ticker PYG in May 2018 – provides payroll and human capital management solutions to medium and large enterprises, predominately across the Asia Pacific Region and the Middle East.

Looking at PayGroup’s FY20 results, on a year-over-year basis, the firm in June reported:

  • Statutory revenues of $10.1 million
  • A statutory loss (EBITDA) of $0.6 million
  • Cash on hand of $9 million, of which $7 million represents restricted funds
  • That it processed 395 thousand payslips per month, up from 347 thousand in FY19

Elsewhere, as part of its FY20 wrap, PayGroup reported on the progress made following its 2019 acquisition of the human capital management company, Asute Payroll. Here, PYG noted that Astute contributed $2.9 million in statutory FY20 revenue – on a growth rate of 45%.

Across the combined businesses, PYG currently boasts close to 900 clients across 33 countries.

Looking forward, PayGroup's MD and CEO, Mark Samlal recently said:

'We enter FY2021 in a good position, with a strong book of recurring revenue, 95% client retention, a cost efficiency plan and strong industry fundamentals in spite of the current COVID-19 headwinds.'

PayGroup share price: the analyst take

Canaccord Genuity Australia this week initiated coverage on PayGroup (PYG) – assigning the stock a Buy rating and a $1.05 price target – based on a 3x FY22 enterprise value/ sales multiple.

Centrally, Canaccord’s analysts believe PayGroup solves a key pain point for its SME and enterprise customers, streamlining the otherwise complex and costly payroll management process.

‘What we like most about the company is that both of its businesses focus on a narrow subset of outsourced payroll solutions that are complex for its clients and where it can be competitive alongside the major global providers. Consolidation is a common theme in this industry, and we believe PayGroup is well-positioned to participate,’ Cannacord analysts said.

Looking forward, the broker is currently forecasting PGY's revenue will hit $18.5 million in FY21 and then $22 million in FY22; against forecasted earnings (EBITDA) of $4.0 million in FY21 and $5.5 million in FY22.

The broker’s analysts cite systems, competition and covid-19 impacts as the main risks to PayGroup -- as well as 'key man risks' stemming from the company’s suggested reliance on its CEO, Mark Samlal.

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