ELMO confirms the company is in play

Some speculative buying by those in the know pushed ELMO’s (ASX: ELO) share price up around 28% to $3.125 during a brief pocket of trading this morning, before the embattled software company entered a trading halt.

Half an hour later management confirmed that several parties have expressed interest in making a play for the smallcap tech stock.

While ELMO resumed trading swiftly after the announcement was made, the share price has since only managed to inch another 2% higher to $3.165.

Nothing may happen

While shy on specifics, management advised the market that the company has entered discussions with selected parties - including San Francisco-based a software/tech specialist investment firm Accel-KKR - with a view to maximising shareholder value.

"No agreement has been reached in relation to any transaction, and there is no certainty that any proposal received will result in a binding offer or that any such offer would be recommended to shareholders," management noted.

Accel-KKR is having another crack

Today’s announcement puts paid to rumours that have been circling since June that Accel-KKR had made an unsuccessful $6.10 a share indicative cash bid for the business.

Despite the bid offer being more than double ELMO’s previous closing price – well down on the year-to-date high of $4.83 – the offer is understood to have quickly fallen over following a preliminary due diligence.

What happened at the full year?

The stock moved marginally higher mid-August after posting FY22 earnings Underlying earnings (EBITDA) of $7.1m, up from $600,000, on revenue of$91.4mn, up 32%.

Net loss after tax attributable to equity owners was up 110% at $79m.

For FY23 management guided to:

• Annualised recurring revenue (ARR) to grow 24% to 29% ($134m to $140m)

• Revenue to grow 25% to 31% ($114m to $120m)

• Earnings (EBITDA) to triple to a range of $20m to $25m

• Operating cash flow to end up between negative $2mand positive $2m

At 30 June 2022 ELMO had $40.5m of debt, up on $30.0m over one year and had $27.6m in cash.

What brokers think

Founded in 2002 and listed at $2 as a breakeven tech play offering cloud-based solutions for SMEs, ELMO was trading at over $7.50 early July 2019, but has progressively bounced lower ever since.

Following the tough love dished out to tech stocks, highly exposed to a rising interest rate environment, ELMO’s share price is down -34% over the last 12 months.

But October clearly marks a turning point for the stock, with the share price up around 40% from a low of $2.05.

Consensus on ELMO is moderate Buy.

Based on Morningstar’s fair value of $5.48 the stock appears to be undervalued.

Late August Morgan Stanley retained an Overweight rating and target price of $3.50 and was encouraged by the company’s plans to deliver operating leverage to gross margins, sales and marketing, general and administrative and research and development.

Expect future broker upgrades to follow greater disclosure on the next bid offer by Accel-KKR and/or others.

ELMO Software was up 30% an hour out from the close.