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Why the ELMO (ASX:ELO) share price is going NUTS

The ELMO Software Ltd (ASX:ELO) share price has jumped 30% in trading after coming back to the market. There is takeover interest.

The ELMO Software Ltd (ASX: ELO) share price has jumped 30% in trading after coming back to the market.

For people that haven’t heard of ELMO before – it’s not related to Sesame Street – the company offers cloud-based software for small and medium businesses to manage people, processes and pay. It operates across Australia, New Zealand and the UK.

It operates through a software-as-a-service business model. In other words, it receives recurring subscription revenue.

Takeover talk

In an ASX announcement, the company referred to recent media speculation regarding possible corporate activity.

ELMO confirmed that it has received approaches expressing interest in buying the company from “various parties”, including Accel-KKR. The idea with these talks with “selected parties” is “maximising shareholder value”.

The ASX tech share confirmed that 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”.

What to make of the ELMO share price

Considering the share price is still down 30% in 2022 to date, today’s price is not exactly expensive.

The FY22 result included several positive elements. Annualised recurring revenue (ARR) increased 29% to $108.2 million, with actual revenue going up 32% to $91.4 million.

It achieved underlying EBITDA (EBITDA explained) of $7.1 million, up $6.5 million.

In FY23 it’s expecting to reach ARR of between $134 million to $140 million, with organic growth of between 24% to 29%.

Operating cashflow is expected to be breakeven in FY23. EBITDA is expected to be between $20 million to $25 million for the year.

If an offer comes through, then I think it will need to be at a double-digit premium to today’s level to be entertained by the leadership.

With higher interest rates, I’m not sure how much bidders will be willing to try to buy the company for. But, I do think that ELMO has a compelling future, or it could be taken over at a price that’s higher than today’s level.

I have my eyes on other ASX growth shares for now.

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