Kingfish, a listed investment fund that targets New Zealand shares, has added Xero to its holdings because it is more confident in the unprofitable accounting software company's earnings in its biggest market, Australasia.
"We have been reluctant to own Xero historically due to the lack of bottom line profitability, however, we estimate that the Australian/New Zealand businesses were profitable in the 2017 financial year and that Xero is on track to achieve higher group earnings this year and in the future," said Frank Jasper, chief investment officer at Fisher Funds, which manages Kingfish.
Xero shares have surged 103 per cent this year, making the company third-best performer on the S&P/NZX 50 Index behind a2 Milk and Synlait Milk. It rose 1.1 per cent to $35.48 today, valuing Xero at $4.9 billion. It has a March 31 balance date and last year narrowed its full-year loss to $69 million as revenue climbed 43 per cent to $295m. Of that, ANZ revenue rose 45 per cent to $208m and international gained 38 per cent to about $88m. Analysts have predicted that Xero will post a maiden profit in 2019.
Investors have had more than one opportunity to profit from the company's share price performance since it went public in 2007 with a strategy to chase sales growth ahead of profits. The stock soared to as high as $44.99 in March 2014 but had retreated back to $15 by October of that year.
"Xero is a great example of a quality company with a number of positive attributes," Jasper said in Kingfish's monthly update. "It is the market leading provider of cloud-based accounting software for small-to-medium businesses and their accountants in New Zealand, Australia and the UK, with growing presences in the USA and other markets such as South East Asia. We believe that Xero will continue to be the innovator of the industry."
