Xref (ASX:XF1) is taking IT to the Cloud
By Jason McIntosh | Published 15 October 2021
Jason McIntosh explains why Xref [ASX:XF1] could be an ASX stock to buy now. The company provides an innovative cloud based solution for HR professionals. Record sales growth and strong client retention underpin the operation. The share price is also showing positive momentum.
Xref probably isn’t an ASX stock that quickly springs to mind.
And that’s no surprise. With a market cap of only $118 million, Xref isn’t yet in the All Ordinaries. So it’s fair to say that relatively few investors know the company exists.
But a stock needn’t be a household name to present an opportunity. In fact, some of the best performing stocks each year are companies that few people knew about.
So, what does the company do?
Xref provides a solution to a time consuming HR task: Referencing checking. The company’s software automates the process, leading to a fast turnaround of accurate data.
A big advantage of the software is that HR don’t need to speak to a reference provider. This removes the difficulty of catching the provider at the right time and scheduling meetings.
Another benefit is that it helps identify a person’s true skills. The software based reference checking makes it harder for fraudulent operators to get passed the screening.
Xref’s software is cloud based. It allows HR to enter a prospective employee into their system. The prospect then logs on and passes details onto their reference providers. The providers then logon and complete the questionnaire at a time that suits.
Xref integrates also integrates with other HR software, increasing its appeal.
Management says that COVID has been a positive for the business. With many HR staff operating from home, this has put a big focus on technology that helps operate remotely.
And demand is growing quickly…
Revenue rose 56% to $12.5 million in the 2020/21 financial year. The latest result is also 159% above the revenue figures reported three years ago, indicating significant growth.
The positive momentum has continued into the current year. Record growth in the September quarter saw group sales rise 126% (to $5.4 million) on the corresponding period. New business accounted for 19% of sales, and 16% came from the European and North American operations.
It’s interesting to note that 16.5% of sales are from clients who joined prior to FY17. This suggests that Xref is having success in retaining clients — a big positive for an emerging business.
Notable new Australasian clients include The Arnotts Group, Ozcare, Fortescue Future Industries, and Kiwibank. The company also signed H&M Group and Maybourne Hotels in the UK, as well as The University of Pittsburgh in the US.
Xref achieved its first cashflow surplus in FY21. The company is also EBITDA positive ($1.04 million) after years of investing in its platform. And a $1.2 million cash flow surplus for the quarter took cash at bank to $9.4 million (30 September).
Okay, let’s have a look at the chart:
Xref came to my attention during July. The shares were starting to regain momentum after a six-month pullback. They were also turning higher from a low base.
Another feature to note is that the moving averages had recently become positive. My primary trend indicator is to have the 50-day moving average above the 100-day moving average.
The trigger for the buy signal was a breakout to a 70-day high. This coincided with the shares breaking above a resistance band between 29 and 30 cents (not shown on chart).
You’ll see Motion Trader’s three entry points on the chart. The most recent was at 56 cents in September (via the Multi Motion service).
Xref has been pushing higher since Motion Trader last entry signal, and some consolidation is possible. That said, I believe Xref is an interesting small cap with considerable potential.
Finally, management own a significant stake in the business. It’s always good to see the people behind a company backing the vision with their own money.
Where to invest now?
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I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.