Australia | Dec 22 2021
This story features READYTECH HOLDINGS LIMITED. For more info SHARE ANALYSIS: RDY
Analysts believe ReadyTech's acquisition last week of cloud-based contract management and procurement software provider Open Windows Software was struck on a good price and represents a good strategic fit.
-Deal cements a tender partnership
-Fill the gaps in ReadyTech’s offering
-Strong cross-sell opportunities
By Sarah Mills
ReadyTech ((RDY)) has purchased cloud-based contract management and procurement software provider Open Windows Software for $14.8m ($4m – or 84% – cash and $768,000 – or 16% – scrip), and a further -$9.5m cash and scrip deferred consideration over 4.5 years.
The acquisition, announced last Friday, was completed on December 16. The share price rose 8% on the news but has since retreated to $3.70 (Monday close).
Management says the deal is expected to deliver recurring revenue of about $1.5 million in FY22, and guides to an earnings (EBITDA) margin of 16% (before projected transaction and integration costs of approximately $0.6m).
Analysts at Macquarie, Wilsons and Jarden believe the acquisition was struck on a very attractive multiple and represents a good strategic fit for the company.
They note the purchase fills gaps in ReadyTech’s Open Office offering while providing strong cross-sell opportunities into Open Windows’ primarily state and local government client base.
Open Windows SaaS business sells its Modular Procurement Suite to more than 80 public and private-sector customers. It contains source-to-contract management modules covering the contract lifecycle from tenders, compliance, contracts, supplier relationship management (SRM) and sourcing.
Jarden notes the price was struck on a 2.9x multiple of forecast annual recurring revenue of $4.9m (4.8x on current revenue).
The only general challenge in Jarden’s view is that management’s guidance of $1.5m revenue contribution in FY22, on an underlying EBITDA margin of 16%, compares poorly to ReadyTech’s Open Office margin of 35%.
Deal cements tender partnership
The two companies have previously tendered in partnership to fill gaps in the ReadyTech offering relative to peers, such as Civica and TechnologyOne, which have proprietary solutions. The three brokers like the fact that the companies have a good track history given the founders have chosen to stay with the company.
Macquarie likes that Open Windows' founders will remain aligned and expects upside from revenue synergies.
Acquisition fills gaps in ReadyTech’s offering
For this reason, Wilsons believes the main aim of the purchase is to beef up ReadyTech’s capability, with cross-sell ambitions a secondary benefit.
“Post-integration, we believe Open Windows and Open Office will form a more comprehensive one-vendor, single-source solution,” says Wilsons.
Macquarie expects a boost for tender win rates from an expanded product offering post acquisition
Macquarie says this improves ReadyTech’s competitiveness for larger council contracts given its main peers have their own proprietary systems.
Strong cross-sell opportunities
Macquarie notes there is very little customer overlap between the companies, offering strong cross-sell opportunities to ReadyTech; while Open Windows will benefit from greater access to research and development and marketing funds.
Macquarie raises FY22, FY23 and FY24 EPS forecasts 1%, 2% and 2%. Target price rises to $4.10. The broker spies an undemanding valuation of 22x FY23 price earnings and expects multiple re-rates as mid-teen organic revenue growth guidance is delivered.
Macquarie increases its target price to $4.10 from $3.98. Outperform rating retained.
Wilsons holds an Overweight recommendation and $4.19 target price.
The broker retains a target price of $4.10 and Outperform rating.
The deal within context
In August, ReadyTech reported a 27.4% rise in FY21 full-year revenue to $50m in the year to June 30. After-tax profit rose 45.3%.
About 87% of revenue came from recurring subscription contracts and customer retention was 96%.
Management guided to organic revenue growth in the mid tends for FY22 and an increase in the EBITDA margin between 36% and 38%.
The share price peaked at $4.23 in August following publication of the results, taking its annual gain to 70%.
But it has retreated roughly 12% in the past month as euphoria subsides; and as the appetite for growth stocks wanes as inflation fears wax.
Announcing the acquisition, ReadyTech’s CEO March Washbourne said:
“Open Windows has a strong reputation for its modular SaaS-based approach, unique workflow process design, modern user interface and ability to handle the complex requirements of multiparty contract management and procurement supply chains.
“Open Windows further fortifies Ready Tech’s product-market fit and is suitable to cross-sell to a broad range of our customer base. In particular, Open Windows’ focus on local government makes it a highly strategic and compelling fit for our Government & Justice segment.”
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