Xero will make hay from Aussie law change, analyst says

Xero Australia managing director Trent Innes says the law change has created a "huge opportunity" for Xero and its partners. Photo / Supplied

ASX-listed Xero is poised to make hay from a law change across the Tasman, Craigs Investment Partners deputy head of institutional research Stephen Ridgewell says.

Australia's Parliament has just passed a law that will require some 700,000 small businesses to adopt a single-touch payroll solution (or STP) by the start of the country's new tax year on July 1.

It's being billed as the biggest accounting shakeup since Australia introduced GST two decades ago.

Currently, only companies with 20 or more staff have to use a single-touch software solution rather than pen and paper.

While small businesses have become more and more tech-savvy in recent years, there is still a large pool using either pen and paper, Excel, or non-compliant payroll software, Ridgewell says and hence he sees the law change as "a catalyst for an acceleration of subscription growth in Australia going into Xero's 2020 financial year".

Xero is touting an Australian Tax Office survey that found one in five small businesses still use pen and paper.

The cloud accounting software company positioned itself for the law change by announcing its first standalone payroll product earlier this month. The snappily named Xero Payroll for Single Touch Payroll will be launched by July 1 and cost about A$10 a month for a small business, Xero Australia managing director Trent Innes says.

The legislative change is a "huge opportunity" for Xero and its partners, Innes says, especially with around 90,000 "micro-businesses" that will need to be walked through the new requirements.

Arch-rival MYOB should also benefit from the law change, but is the subject of a buyout offer from KKR that will likely see it delist from the ASX before July 1.

Ridgewell says the new payroll requirement will boost Xero's growth in Australia in 2020, allowing it to hit its targets even if growth slows in one of its other key markets, the UK, amid a possible Brexit-induced recession.

The analyst has a "hold" rating on Xero and a 12-month target price of A$45.70 (shares were at A$47.96 in mid-Thursday trading). He says the company is performing well and fast approaching "ground zero" or break even, but already full-valued.