A few investors have noticed Forager’s recent sale of our substantial holding in Reckon (RKN). We will provide more details in the September Quarterly Report. But to head off a few questions we have been receiving, our rationale can be summarised into four broad 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, 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 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.
10 thoughts on “Why We’ve Sold Reckon”
I agree with you on the last point. APS is only ~50% of Practice Management revenue and the CY16 presentation shows it flat for some time. The buy thesis is to hope for a takeover sooner rather than later given accounting software competition will only intensify reducing RKN’s value. Meanwhile free cash will be improved but not stellar after the GetBusy spin out – a big chunk of the investment is in ReckonOne and APS.
The GetBusy spin out was stupid, a complete betrayal of the mum and dad retail investors, AIM listed shares that are useless.
Lots of valid reasons to sell Reckon, however none seem to impact on the Get Busy valuation, which is about three times the price you’re receiving for that entitlement. Would it have been possible to retain the Get Busy part and sell the Reckon remainder? This is often the case with ‘spinoffs’. And why is it so difficult for an Australian to own the shares? The AIM is part of the London Stock Exchange, so I would have assumed it would have been straight forward.
Am I missing something obvious?
Good call. I consider APS as an end of life product; it has a very old architecture, a very poor user interface, and I suspect a lot of code that’s been written under old coding practices and will be very hard to modernise. It’s very difficult and expensive to integrate with 3rd party products such as modern CRMs and cloud services. It’s ripe for disruption, and even accounting for the big four’s considerable lethargy when it comes to changing core technologies, I think the time is nigh.
Good decision. I like the thought process that produced it.
This looks like a case study straight out of Joel Greenblatt’s “You can be a stock market genius” !!
Thanks for sharing the rationale for this. Seems like management are acting in their own interests. Good to again to see conviction to sell when you’ve identified the investment thesis is broken.
I for one think the days of Reckon are numbered. Accounting is headed for the cloud and Reckon has a projection of at least 5 years before they have a cloud product ready to replace APS. My business will have transitioned away before that 5 years has come around. ccH is going to take over this space, you watch.
Agree, RKN is headed further down. Assuming user loyalty in this tech space is not a good basis for a value premium. Firms like ours running APS are not going to wait 3-4 years and have to buy new servers in the interim. Disagree with the cCH comment. In a trial out we found it took too long to process tax returns and the accounting side wasn’t comparable either. I like what I’m hearing about Sage’s cloud practice solution being built on Salesforce – top 100 firms are going to find that combination appealing.
Hmm – thanks for the article, but you have a very different read of the Co. than I do. I note most of the other Commenters more-or-less agree with you too.
I saw GETB as being a drag on RKN’s core profitability. Now they’re free of it, they can focus on what they do best. We can’t both be right – we’ll find out in a couple years I guess! RKN seems reasonable to me @ the $1.2 mark – just averaged down a bit. I kept the GETB shares, though I have no idea how to sell them on the AIM. There’s got to be a way though.