TechnologyOne’s Solutions To The Fore

This story features TECHNOLOGY ONE LIMITED. For more info SHARE ANALYSIS: TNE

TechnologyOne still expects to be a beneficiary of the changes in software delivery although brokers are finding the valuation increasingly full.

-Step up to $500m in revenue by FY24 appears increasingly aspirational
-Continuing to invest in R&D to improve the product
-UK expected to break even in FY21
 

By Eva Brocklehurst

The coronavirus pandemic is accelerating the global move to software-as-a-service and TechnologyOne ((TNE)) expects to remain a key beneficiary. The company's main product has full functionality anywhere,  on any device. Originally designed for a remote work force this feature is at the forefront in the current environment.

While the outlook is not as robust as Morgans had anticipated, relative to many other companies subject to global disruption TechnologyOne produced a strong first half result.

Annualised recurring revenue is expected to grow in excess of 30% in FY20 with profit growth in the range of 8-12%. This is below the historical 10-15% range and reflects the temporary slowdown in momentum because of the pandemic.

As a result, Ord Minnett suggests management's targeted step-up to $500m for revenue by FY24 is increasingly aspirational. The company has noted no specific pandemic impact but the fact guidance has been lowered reflects some caution, Macquarie agrees.

Meanwhile, TechnologyOne is continuing to invest in R&D to progressively improve the attractiveness of its product. Less than half of its customers use the cloud and this is expected to increase to more than 80% by FY22.

First half net profit grew 6% but missed Bell Potter's forecasts because of lower pre-tax profit margins. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, downgrades forecasts by -4% for FY20 and FY21, because of a modest reduction in revenue estimates and margins. Pre-tax profit growth of 10% in FY20 is now expected and Bell Potter retains a Hold rating and $9.50 target.

Valuation

Morgans assesses the business is high-quality but subject to increased volatility, while technology companies in general are trading at elevated multiples. This is likely to continue for some time, given lower interest rates. Moreover, investors are warned to be aware of changing interest rates and sentiment, which swings the valuation materially for growth stocks.

Ord Minnett finds it difficult to arrive at a valuation that justifies the share price and, as achieving key targets appear to be difficult in the short term, retains a Lighten rating.

Macquarie also notes the first half results imply a 70% second half skew to hit full year guidance. Transitioning existing customers will be required to maintain valuation support at current levels, which are near all-time highs. Still, the quality of the business helps support the valuation in the current market, in the broker's view.

Wilsons, also not one of the seven, on the other hand, agrees the current valuation fully reflects both the margin and global expansion opportunities.

A key vertical, government business, is expected to stay robust and the company should achieve its targets of doubling the business every 4-5 years. Wilsons retains a Market Weight rating along with a $8.98 target.

UK

Macquarie asserts the UK market, albeit three times the size of Australia, is unlikely to be a material driver of revenue in the medium term. Growth rates appear to be constrained by the company's business model and targeted customer base that includes local government and education.

Meanwhile, consulting staff are limited and building up functionality in new regions against local incumbents remains challenging. Customers typically have long cycles for tenders and lower churn. Still, customer migrations are occurring and the UK is expected to break even in FY21.

There are three Hold ratings and one Sell (Ord Minnett) on FNArena's database. The consensus target is $8.30, suggesting -15.9% downside to the last share price.

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