Author: therawinformant

Is the Rural Funds Group (ASX: RFF) share price a buy for its dividend yield?

An overview of Rural Funds

Rural Funds is an agricultural real estate investment trust (REIT). That means it owns commercial properties that are leased out and generate rental income.

Specifically, Rural Funds owns a variety of farmland properties across five sectors: cattle, vineyards, almonds, macadamias and cropping (sugar and cotton).

It has 22 cattle properties, seven vineyards, 23 cropping properties, six macadamia properties and three almond properties. These properties are spread across a variety of states and climactic conditions for diversification.

The split between the income sources isn’t even. Rural Funds has provided an estimate for its FY21 revenue. Around 45% is expected to come from almonds, 36% from cattle, 6% from vineyards, 6% from cropping, 2% from macadamias and 6% from ‘other’.

Rural Funds has rental indexation built in to all of its contracts with tenants. The rental increases are largely either a fixed 2.5% increase with market reviews, or linked to CPI inflation.

More than three quarters of revenue from Rural Funds’ tenants are large farming enterprises such as JBS, Select Harvests Limited (ASX: SHV), Olam, Australian Agricultural Company Ltd (ASX: AAC), Queensland Cotton, Treasury Wine Estates Ltd (ASX: TWE) and Stone Axe.

How is income generated for shareholders?

The REIT receives rental income from its tenants. The farmland REIT then pays for all of the operating expenses of the farms that Rural Funds pays like insurance cost recoveries, as well as other expenses like ASX fees, bank fees, audit fees, bank interest and so on.

What’s left is called AFFO.

‘AFFO’ which stands for adjusted funds from operations (AFFO). This is a financial metric used in the REIT sector to measure available cashflow from operations (the adjustment relates to a non-cash tax expense).

Rural Funds pays its distribution from the AFFO. In FY20 it generated 13.5 cents of AFFO per unit/share. It allowed Rural Funds to pay a distribution of 10.85 cents per unit, which was a 4% increase despite COVID-19.

The REIT aims to grow its distribution by 4% per annum for investors, which is funded by excess AFFO generation.

What’s the prediction for FY21?

In FY21 Rural Funds is expecting to make 11.7 cents of AFFO per unit and the distribution is expected to be 11.28 cents, which is in line with its 4% growth target. That represents a payout ratio of 96.4%.

The AFFO is expected to decrease as funds are re-invested into macadamia orchard developments which are expected to produce higher income when leased.

Maryborough macadamia plantings are to commence in late FY21. The REIT said that it will take several years to fully develop Maryborough and Rockhampton properties. In the meantime, the majority of the Maryborough farms are expected to be leased as cropping operations (primarily sugar cane) whilst Rockhampton assets are expected to be leased as cattle properties.

At the current Rural Funds share price, that means it has a FY21 distribution yield of 4.7%.

Is the Rural Funds share price a buy for dividends?

Rural Funds is currently rated as a buy by Motley Fool’s Dividend Investor’s Edward Vesely and the pick has performed well since the first buy recommendation in August 2017 when the share price was $1.64.

In FY20, its adjusted net asset value per unit – the underlying ‘book’ value per unit – grew by 8% to $1.94. That means the current share price is valued at a 24% premium to the adjusted NAV.

More reading

• 2 ASX dividend shares with 4% yields
• Top ASX shares to buy in November 2020
• 3 ASX 200 shares that every investor should own
• How ASX investors can capture these ‘billionaire trends’
• Why market crashes are useful for buying ASX dividend shares

Motley Fool contributor Tristan Harrison owns shares of RURALFUNDS STAPLED. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Buy and hold investing is one of the most popular investment strategies and used (to great effect) by legendary investor Warren Buffett.

The strategy sees investors buy quality shares and then hold onto them for the long term, allowing compound interest to work its magic.

To demonstrate how successful it can be, every so often I like to pick out a number of popular ASX shares to see how much a single $20,000 investment 10 years ago would be worth today.

With that in mind, here’s how $20,000 investments in these ASX shares would have fared:

Aristocrat Leisure Limited (ASX: ALL)

Thanks to its industry-leading pokie machines and its expansion into digital and mobile gaming via some very successful acquisitions, Aristocrat Leisure has been a strong performer over the last 10 years. This has led to above-average sales and earnings growth, which has underpinned market-beating returns for investors. Over the last decade, the Aristocrat Leisure share price has generated an average total return of 25% per annum. This would have turned a $20,000 in 2010 into $186,000 today.

REA Group Limited (ASX: REA)

Over the last decade this property listings company has benefited greatly from the shift online and carved out a leadership position in the industry for itself. Unsurprisingly, this has supported very strong earnings growth since 2010, much to the delight of long term shareholders. Over the 10 years, the REA Group share price has generated an average annual total return of 29.2%. This means that a $20,000 investment would be worth $259,000 today.

Sydney Airport Holdings Pty Ltd (ASX: SYD)

Despite losing almost a third of its value over the last 12 months due to the impact of the pandemic on the travel industry, this airport operator’s shares have still smashed the market since 2010. Thanks to its position as the busiest airport in Australia and the global tourism boom, Sydney Airport shares have provided investors with an average total return of 11.9% per annum over the last 10 years. This would have turned a $20,000 investment into almost $62,000.

More reading

• Which 5 ASX shares hit 52-week highs on Friday?
• ASX 200 rises again on Friday
• All eyes on the REA Group (ASX:REA) share price after Q1 results
• Travel shares are flying higher today. Here’s why.
• 3 ASX shares rated as buys by brokers

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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There are some ASX small cap shares worth buying and owning according to fund manager Naos Asset Management.

What is Naos Asset Management’s investment approach?

Naos is led by chief investment officer (CIO) Sebastian Evans. NAOS Small Cap Opportunities Company Ltd (ASX: NSC) is one of the listed investment companies (LIC) operated by Naos.

That particular LIC looks at businesses with market capitalisations between $100 million and $1 billion.

The fund manager has a number of investment focuses. It looks for businesses that are good value with long term growth potential. With its portfolio, Naos believes it’s better to have a quality portfolio rather than numerous holdings. That’s why it only holds around 10 positions in each fund, with each ASX share representing a high-conviction position.

Naos invests in those ASX shares for the long-term. It considers the performance and the liquidity of its positions whilst ignoring the index. So performance can sometimes be quite variable when compared to the index.

It looks to invest purely in industrial companies whilst considering the ESG factors (environmental, social and governance).

What are some of the ASX small cap shares that it thinks are opportunities?

In its latest monthly update for 30 September 2020, Naos gave the latest commentary for some of its positions.

Over The Wire Holdings Ltd (ASX: OTW)

Naos describes Over The Wire as a founder led, ‘B2B’ (business to business) provider for IT and telecommunications systems. The ASX small cap share’s purpose, according to Naos, is to simplify technology to empower business through service offerings such as a national voice network, public cloud, cyber security services and on-demand cloud connectivity.

Naos explained that Over The Wire recently announced the acquisition of cloud business Digital Sense Hosting, which provides most of its services to enterprise and government clients. The fund manager believes that this is an excellent strategic fit for the business for numerous reasons.

Firstly, the founders of Digital Sense will be taking a significant portion of Over The Wire shares. The business has a revenue profile that is 90% recurring in nature. The offering of Digital Sense will increase Over The Wire’s capability in that sector of the market and bring with it a sophisticated client base.

Naos pointed out that the small cap ASX share has now made two significant acquisitions in a short period of time that could potentially increase the earnings before interest, tax, depreciation and amortisation (EBITDA) by $14 million over the next 24 hours. The fundie firmly believes that the ASX share has the potential to generate a normalised run-rate of more than $35 million of EBITDA in FY22, which together with significant free cash flow generation, “should” see Over The Wire command a premium EBITDA multiple.

BSA Limited (ASX: BSA)

Naos describes this small cap ASX share as a solutions-focused technical services organisation. BSA assists clients in implementing their physical assets, needs and goals in the areas of building services, infrastructure and telecommunications. Some of BSA’s clients include the NBN, Aldi. Foxtel and the Fiona Stanley Hospital.

Although no company specific announcement was released by BSA, the NBN – BSA’s largest customer – announced plans to upgrade the existing network by spending up to $4.5 billion over the next two or three years. Naos said the upgrade will focus on providing fibre to homes that are currently on the fibre to the node technology as well as spending around $400 million on upgrading HFC connections.

Naos believes this is a “significant” opportunity for the small cap ASX share to secure further works with the NBN, as the vast majority of all BSA work with the NBN to date has been around the so called ‘last mile’ between the node and the connection to the home.

The fundie said that if BSA can secure some of this work, it is not inconceivable that it could present an opportunity worth $100 million to $250 million per annum over the next two to three years. Just as importantly, Naos believes the renewal process for the operations and maintain master agreement (OMMA) is underway and an outcome is expected before Christmas. If BSA can secure an extension to this contract as well as new works under the upgrade plan, then there is potentially a period of “significant revenue growth ahead”.

More reading

• 3 ASX small cap shares you must add to your watchlist

Tristan Harrison owns shares of NAO SMLCAP FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Over The Wire Holdings Ltd. The Motley Fool Australia has recommended Over The Wire Holdings Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Despite the U.S. election uncertainty, the S&P/ASX 200 Index (ASX: XJO) has just had its best week in a month and recorded a very strong gain. The benchmark index climbed a sizeable 4.4% to end the week at 6,190.2 points.

Unfortunately, not all shares were climbing higher last week. Here’s why these were the worst performers on the index:

Pendal Group Ltd (ASX: PDL)

The Pendal share price was the worst performer on the ASX 200 last week with an 8% decline. Investors were selling the fund manager’s shares following the release of its full year results. Pendal reported cash earnings per share of 45.5 cents, which was down 11% from 51.3 cents per share a year earlier. This was driven by a 4% decline in funds under management and a 3% increase in its operating expenses.

Fortescue Metals Group Limited (ASX: FMG)

The Fortescue share price was out of form last week and dropped 4.7% lower. The catalyst for this decline was a pullback in iron ore prices. Over the five days, the steel making ingredient shed 2.7% of its value. This appears to have been driven by an expected increase in global iron ore production during the fourth quarter of 2020.

Treasury Wine Estates Ltd (ASX: TWE)

The Treasury Wine share price wasn’t far behind with a 4.6% decline over the five days. This appears to have been driven by its annual general meeting. At the event, management provided an update on Chinese investigations into wine dumping. It advised that the China Alcoholic Drinks Association has submitted a written request to the Chinese Ministry of Commerce that imports of Australian wine in containers of two litres or less into China be subject to retrospective tariffs.

Unibail-Rodamco-Westfield CDI (ASX: URW)

The Unibail-Rodamco-Westfield share price was a poor performer once again and dropped a further 4.6%. This stretched the shopping centre operator’s year to date decline to 46.1%. Last week’s decline was driven by the release of its guidance for 2020, which fell short of expectations. Unibail-Rodamco-Westfield’s underperformance appears to have been caused by elevated rental relief as larger agreements are executed.

More reading

• Here’s what a Joe Biden victory would mean for ASX shares
• The ASX 200 shares rocketing on takeovers, upgrades and low interest rates
• 2 ASX dividend shares with yields over 8% today
• Why the Treasury Wine (ASX:TWE) share price is surging higher today
• ASX 200 shoots 1.3% higher on Thursday

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Is the National Australia Bank Ltd (ASX: NAB) share price a buy for dividends? It was in the headlines this week. 

NAB shares have been rallying since the start of November 2020, its share price is around 4%. The major ASX bank just released its FY20 result which showed a sharp decline in profit and another dividend cut.

What was in the FY20 result?

NAB reported that its statutory net profit after tax (NPAT) was $2.56 billion, which was significantly impacted by COVID-19 effects.

The big ASX bank explained that its credit impairment charges rose by 201% to $2.76 billion. As a percentage of gross loans and acceptances, this represented an increase from 31 basis points to 46 basis points.

The FY20 credit impairment charges included $1.86 billion of additional forward looking collective provisions to reflect potential COVID-19 impacts. That included $388 million of provisions for targeted sectors experiencing elevated levels of risk including aviation, tourism, hospitality and entertainment, retail trade and commercial property.

In terms of arrears, NAB said that its ratio of loans that were over 90 days overdue and gross impaired assets, as a percentage of gross loans and acceptances, increased 10 basis points to 1.03%. NAB explained this increase was due to rising delinquencies in the Australian home loan portfolio where customers are not part of the COVID-19 deferral program.

The cash earnings were also impacted severely by the current conditions. Cash earnings fell 36.6% to $3.71 billion. After excluding the large notable items, cash earnings dropped by 25.9% to $4.73 billion.

There were several large notable items in the result including customer-related remediation, payroll remediation and impairments of property-related assets.

NAB dividend

NAB’s board decided to declare a final dividend of 30 cents per share, bringing the full year dividend to 60 cents per share. That was a cut of around 64% compared to last year.

The bank said that maintaining a strong balance sheet is a key requirement. The final dividend represented 49.8% of continuing operations statutory earnings.

At the current NAB share price, the full year dividend amounts to a grossed-up dividend yield of 4.4%.

Some opinion on dividends

Dr Don Hamson from Plato Australian Shares Income Fund, which focuses on dividends, recently said: “In this current environment … the case for active management is strong. The old days of buying and holding the banks to get income is not going to work and you have to be active.”

Plato put NAB’s dividend outlook into a group of businesses ranked ‘ugly’. Other businesses in that group include Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Scentre Group (ASX: SCG) and Insurance Australia Group Ltd (ASX: IAG).

Commonwealth Bank of Australia (ASX: CBA) was the only major domestic-focused ASX bank which had a ‘bad’ dividend outlook, rather than ‘ugly’.

Plato commented in its annual report: “The last six months in particular was a period where avoiding the dividend traps was especially important as there were particular industries such as banking, retail property trusts, travel and energy stocks that underperformed significantly. In contrast, certain sectors such as the large gold and iron ore miners and well as consumer staples were largely unharmed by the economic environment.”

If you’re wondering which shares don’t have ‘ugly’ dividend outlooks, Plato said that the following large ASX blue chips have good dividend outlooks: Rio Tinto Ltd (ASX: RIO), BHP Group Ltd (ASX: BHP), Fortescue Metals Group Ltd (ASX: FMG), Telstra Corporation Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES), CSL Limited (ASX: CSL), Woolworths Group Ltd (ASX: WOW) and ASX Ltd (ASX: ASX).

More reading

• Here’s how much NAB (ASX:NAB)’s new dividend is worth
• Big 4 banks’ own customers don’t trust them
• ASX 200 shoots 1.3% higher on Thursday
• When ‘cutting rates’ doesn’t mean what you think it means
• NAB (ASX:NAB) share price higher despite reporting 36.6% decline in cash earnings

Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) have made a V-shaped recovery following a weak finish to October. The broad strength and company-specific tailwinds has allowed these five ASX  shares to hit 52-week highs on Friday. 

1. Eagers Automotive Ltd (ASX: APE) 

The Eagers Automotive share price hit a 52-week high of $12.80 on Friday. The automotive sector including competitors such as Bapcor Ltd (ASX: BAP) have been some of the best performing ASX200 shares this year. In its most recent trading update announced on 15 October, the company delivered a 45.4% increase in underlying operating profit before tax for the nine months ended 30 September. While the Eagers Automotive share price is making new highs, its operational and financial performance have also lived up to expectations. 

2. Lynas Corporation Ltd (ASX: LYC) 

The Lynas share price has pushed higher in recent months to a 52-week high of $3.08. Lynas is the world’s second largest producer of rare earths outside China. The increasing importance for rare earth minerals has put Lynas in the spotlight with recent contracts signed with the US Department of Defense for a US-based rare earths facility and expanding its production capabilities in Western Australia and Malaysia. 

3. Nextdc Ltd (ASX: NXT) 

Data centres continue to capture the tailwinds of an increasing appetite for cloud and connectivity services. This, combined with the recent surge in US tech and ASX200 shares, has seen the NextDC share price hit a record all-time high just shy of $14.00. 

4. REA Group Limited (ASX: REA) 

The REA Group share price continues to grind higher despite ongoing impacts of COVID-19 on property markets. The company released its first quarter FY21 results on Friday. They highlight a 3% fall in revenues and 8% increase in earnings before interest, tax, depreciation and amortisation (EBITDA). In October, national residential listings were down 1%, with increases in Melbourne and Sydney of 14% and 2% respectively, offset by declines in other markets. The REA Group continues to see strong levels of buyer inquiry, underpinned by low interest rates and healthy bank liquidity. Its sound results pushed its share price higher to a record all-time high of $132.14.

5. Wisetech Global Ltd (ASX: WTC) 

The Wisetech share price hit a 52-week high of $32.34 on Friday. Its shares are clawing back last year’s underperformance following J Capital’s short selling report and weaker-than-expected earnings. The company has not released any market sensitive news in October besides a strategic alliance with OFX Group Ltd (ASX: OFX). The market did react positively to Wisetech’s FY20 results back in August. The lingering sentiment and soaring tech shares may be pushing the Wisetech share price higher. 

More reading

• These were the best performing ASX 200 shares last week
• ASX 200 rises again on Friday
• OFX (ASX:OFX) and WiseTech (ASX:WTC) share prices rally on new partnership
• All eyes on the REA Group (ASX:REA) share price after Q1 results
• Latest ASX small cap buy calls from top brokers

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Bapcor. The Motley Fool Australia owns shares of WiseTech Global. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The S&P/ASX 200 Index (ASX: XJO) was well and truly on form last week and charged materially higher. The benchmark index rose an impressive 4.4% higher to end the period at 6,190.2 points.

While the majority of shares on the index climbed with the market last week, some recorded stronger gains than others.

Here’s why these were the best performing ASX 200 shares over the five days:

Tabcorp Holdings Limited (ASX: TAH)

The Tabcorp share price was the best performer on the ASX 200 last week with a gain of 24.6%. The majority of this gain came on Friday when the gambling company was the subject of takeover speculation. That speculation suggested that a private equity firm is aiming to acquire the company and put former SportsBet CEO, Matthew Tripp, in charge. Tabcorp advised that it is not aware of any proposal.

Flight Centre Travel Group Ltd (ASX: FLT)

The Flight Centre share price wasn’t far behind with an impressive 24.4% gain last week. Investors were buying the travel company’s shares following the release of its annual general meeting update. That update revealed that bookings are improving and its corporate travel business is performing better than expected. This also helped give the Webjet Limited (ASX: WEB) share price a boost. It recorded a sizeable 20.3% gain over the week.

News Corporation (ASX: NWS)

The News Corp share price was a strong performer and shot 19.2% higher over the five days. A large portion of this came on Friday following the release of the media giant’s first quarter update. New Corp revealed net income of $47 million, compared with a net loss of $211 million in the prior year. A key driver of this result was its Dow Jones business, which posted a record first quarter of profitability and higher revenues.

Eagers Automotive Ltd (ASX: APE)

The Eagers Automotive share price was on form and raced 16.5% higher last week. The catalyst for this was news that the auto retailer has acquired three new sites in Western Australia for a consideration of $30.3 million and a strategic site in New South Wales for $76.3 million. One broker that liked what it saw was UBS. It retained its buy rating and $13.00 price target on the company’s shares. The Eagers Automotive share price ended the week at $12.65.

More reading

• Here’s what a Joe Biden victory would mean for ASX shares
• ASX 200 rises again on Friday
• The ASX 200 shares rocketing on takeovers, upgrades and low interest rates
• Why the Treasury Wine (ASX:TWE) share price is surging higher today
• Tabcorp (ASX:TAH) share price rallies 16% on takeover rumours

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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As I’m sure we would all be aware of today, the vote counting for the US elections is still underway and unresolved. Neither incumbent President Donald Trump or his Democratic challenger, former Vice President Joe Biden, has yet been officially declared the winner of this week’s presidential election. Saying that, Joe Biden is on track to receive the most votes in the electoral college by the most recent vote counts. As such, it is looking increasingly likely that he will emerge the winner from this most extraordinary of elections, going off of the latest data.

So, if Mr. Biden does emerge victorious, what will a new president mean for global markets, and, of course, the S&P/ASX 200 Index (ASX: XJO) and ASX shares?

According to reporting in the Australian Financial Review (AFR), Joe Biden’s priorities (assuming he is sworn in as President of course) are likely to be focused on the coronavirus, economic recovery and healing the bitter divisions that will inevitably stem from the close election result.

These are all domestic American issues.

Bidenomics for the ASX?

However, the AFR article also notes that climate change and foreign policy will be secondary priorities for a Biden administration. On climate change, the article notes that Biden has stated that “if we don’t get this right, nothing else matters”.

As such, it expects Biden to quickly rejoin the Paris agreement on climate change and “pressure other countries to do more. Australia will be among them.”

That may indicate that a Biden presidency might not be too kind to fossil fuel extractors like BHP Group Ltd (ASX: BHP) and Woodside Petroleum Ltd (ASX: WPL)

The article also notes that a Biden administration’s foreign policy may seek greater engagement with China. It’s no secret that Sino-US relations under President Trump have deteriorated amid trade wars and tariff implementation.

The present relationship Australia has with China is also showing signs of being shaky. Just this week, China announced fresh import restrictions on some Australian goods, after flagging wine importation restrictions earlier in the year.

Although the AFR notes that “China will continue to be a central strategic and economic competitor” to the US, it also expects more “direct hard talking” between Washington and Beijing.

If this relationship thaws, we could see a concurrent thawing of our own relationship with China. This could be good news for ASX shares like Treasury Wine Estates Ltd (ASX: TWE) and other Australian companies exporting to China.

All in all, the article posits that a Biden presidency could bring modest changes in the economic sphere, but a dramatic change in the global diplomatic order. It will be interesting to see how these changes play out for Australia and the ASX.

More reading

• ASX 200 rises again on Friday
• The ASX 200 shares rocketing on takeovers, upgrades and low interest rates
• Why the Treasury Wine (ASX:TWE) share price is surging higher today
• OFX (ASX:OFX) and WiseTech (ASX:WTC) share prices rally on new partnership
• 5 things to watch on the ASX 200 on Friday

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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ReadyTech Holdings Ltd (ASX: RDY) provides a software-as-a-service (SaaS) platform for a diverse range of applications. The ReadyTech share price will be on watch on Monday after the company announced a move to grow by acquisition. The company is currently in a trading halt while it makes announcements related to this acquisition.

ReadyTech has executed a heads of agreement and exclusivity agreement to acquire government-based software provider, Open Office. The deal is for an upfront consideration of $54 million and an earn out of up to an additional $18 million. 

Why will the ReadyTech share price be on watch?

Open Office is a leading government and justice case management SaaS provider with a customer base in Australia and the United Kingdom. It provides a platform to local and federal government for various applications including asset management, HR and payroll, community management, finance, and many other applications. 

At present, ReadyTech provides services for student management, HR and payroll, and management of work pathways. Accordingly, the company believes that the acquisition is consistent with its strategy to acquire complementary technologies, thus providing it with the opportunity to focus on new and attractive verticals and target higher value customers. 

The company will pay for this via a fully underwritten institutional placement for up to $25 million. This will be an offer with the ReadyTech share price at $1.88, a 6% discount to Thursday’s closing price. 

Management commentary

ReadyTech CEO Marc Washbourne said the acquisition opportunity is strategically compelling for ReadyTech:

Open Office is a high-quality business, providing solutions to 130 government and global justice clients, with a client retention rate of approximately 95%. It is a resilient market, with long-term government funding. Gaining access to government and justice clients allows ReadyTech to unlock the potential of servicing a new market and adding a third pillar to our operations.

The Open Office acquisition provides ReadyTech with an opportunity to secure a strong foothold into all levels of government in Australia, with the benefits of long-term, sustainable client base with strong barriers to entry. Entering a market of this type requires the type of expertise for which ReadyTech is renowned.

Trading guidance

Aside from the acquisition, ReadyTech has reaffirmed FY21 guidance, with Q1 trading in line with guidance assumptions. Revenue retention for the first quarter of FY21 is maintained at 95%. In addition, gross new business remained at $14 million and the company is investing in sales and marketing to drive top line revenue. The ReadyTech share price is currently up by 11.7% year to date. 

More reading

• 3 ASX small cap shares you must add to your watchlist

Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Readytech Holdings Ltd. The Motley Fool Australia has recommended Readytech Holdings Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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