Week Ahead | Xero Update

18 November 2020

Wall Street gained on Friday (S&P 500 Index +1.4%) as US stocks posted further gains to reach new all-time highs as investors started to reposition for a stronger economy in 2021. Importantly, members of President- elect Joe Biden's COVID advisory team said a nationwide lockdown was unlikely. Small cap stocks and those that have been most affected by social distancing restrictions, such as airlines, continued to outperform.

Disney and Cisco’s upbeat results brought the focus back to corporate earnings at the end of a volatile trading week that saw record surges in coronavirus cases and increased hopes of a working vaccine.


Xero (XRO:ASX)
Shares in Xero were flat late last week as it reported impressive revenue and earnings growth, but a slowdown in subscriber growth that was in line with market expectations. Xero had also run higher as it was being re-weighted in a major global market index – which meant it will attract more passive investment inflows.
Looking at the result detail, strong operating earnings of $120.8m (+83% versus the prior period) and 26% above consensus, with margins of 29.5% driven by cost reductions (vs 19.5% in the 1st half) was the key standout. Total Subscribers of 2.45m were still up +19% from 2.29m in the 2020 full year, and management provided no guidance.

Overall, we see this as a reasonable result given the challenging environment, highlighting good cost management and strong cash conversion, allaying concerns around material customer deferrals. Subscriber growth is the most relevant metric, and this was mixed with ANZ subs +19%, however US sub growth of 17% (10k adds) is modest – as Xero continues to struggle in America.

We have been BUY rated on XRO for some time now and it has been one our top performing stock picks. We continue to see the stock as a solid technology holding as part of a portfolio.


Australia & New Zealand Market Movers

The Australian market slipped for a second consecutive day on Friday (ASX 200 Index -0.2%) as the initial excitement over coronavirus vaccines subsided and investors cashed out after a strong post-election rally. The major banks led the gains last week, tipping a vaccine would accelerate the recovery of the domestic economy.

In stock news, Ramsay Healthcare shares were unchanged as it releases a 1st quarter trading update which was as expected, with revenue and costs were negatively impacted by Covid-19, while Australia is performing better than European operations.

The New Zealand market was a touch higher on Friday (NZX 50 Index +0.2%) ending a strong week in which the NZX 50 gained 3%, climbing deeper into record territory – now up more than 10%year to date. Fisher & Paykel Healthcare kept the market index in the green as the stock continued to recover post the knee-jerk sell-off experienced earlier in the week on the back of covid vaccine news.

Outside of the index, shares in mobile advertising firm Plexure fell -9.7% as it came off a trading halt after raising $32 million of new capital at $1.20 per share. In other stock news, the Warehouse Group reported sales for the first quarter ending 1 November of $738.5 million, up 6.3% on the same quarter last year. Gross margin percentage has also been strong, up circa 1.7% on the 1st quarter last year.


3 Things Markets Will be Watching this Week

  1. ​​​​​​​​​​​​​​Second wave COVID-19 news is back at the top of headlines with social distancing measures being re-introduced, while vaccine developments are also front-of-mind.
  2. Highlights this week include the latest employment data in Australia and earnings from Aristocrat, Ryman Healthcare, Orica, Serko and Napier Port Holdings.
  3. The AGM season continues with Afterpay, a2 Milk, Pointsbet Holdings, REA Group, Precint Properties, Altium, BlueScope Steel, Goodman Group, Mirvac, Resmed, Seek, Lendlease and Kogan.com scheduled to meet with shareholders


Wall Street gained on Friday (S&P 500 Index +1.4%) as US stocks posted further gains to reach new all-time highs as investors started to reposition for a stronger economy in 2021.

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