ReadyTech: Growth, Defence & Value

Australia | Apr 22 2022

This story features READYTECH HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: RDY

Recent research highlights both high growth and defensive qualities for investors in ReadyTech Holdings.

-ReadyTech is trading at a deep discount to peers 
-Potential for accelerated M&A
-The aim of acquisitions to date
-Potential for further overseas expansion

By Mark Woodruff

Following recent share market volatility, investors may be seeking an investment with defensive end-markets across the private and public sector, which are relatively insulated from macroeconomic shocks.

ReadyTech Holdings ((RDY)) fits the bill, according to Goldman Sachs, and also provides exposure to multi-decade structural growth tailwinds as enterprises pursue digital transformation.

The global transition to cloud software-as-a-service (SaaS) from on-premise software is only around 20% completed, according to the broker, and the replacement of decades-old legacy systems is ongoing.

The people management software company is the leading provider of education, employment, as well as government and justice software in Australia. 

The focus is upon complex niches that are under-served by both large and small enterprise software competitors. An example is shift scheduling and award payments in the “stand up economy” (e.g. hospitality, agriculture) and student management systems.

Along business lines, Education & Work Pathways accounts for around 40% of revenue, while Workforce Solutions and Local Government & Justice represent 30% apiece.

When initiating coverage last November, Jarden estimated a 19% five-year compound annual growth rate for revenue, and believed the growth would be mostly organic, coupled with M&A in key verticals.

The most directly comparable peers to ReadyTech on the ASX, according to the analyst, are TechnologyOne ((TNE)), Elmo Software ((ELO)) and US-based Ceridan HCM, which is listed on the Nasdaq.

Goldman Sachs, which initiated coverage on ReadyTech this week with a Buy rating and a 12-month $5.00 target price, feels the market has given little credit for an improving organic growth rate since ASX listing in April 2019. Long-term growth is expected from continued share gains in core verticals in A&NZ, as well as expansion into offshore markets. 

The overseas expansion is currently underway in the UK, and could potentially continue into the US/Canada via the company’s Student Management and Work Pathways software, suggests the analyst.

The opportunity and the undervaluation 

In the past, enterprises have viewed technological investment through the prism of cost reduction.

Now Goldman Sachs believes the aim is to modernise core systems and differentiate versus competitors, which benefits the likes of ReadyTech. In addition, improvement in employee and customer experience is thought to be increasingly important, given ongoing hybrid work environments.

ReadyTech is trading at a deeply discounted valuation to SaaS peers on a growth-adjusted basis, according to the analyst. Organic growth has accelerated to more than 15% in FY22 from around 10% in FY20.

While management has a FY26 organic revenue target of $140m, the broker estimates the market is pricing in around $120m, at a 35% earnings (EBITDA) margin, which doesn’t factor in the recent growth acceleration or any M&A upside.

The currently discounted valuation will likely be narrowed by strong organic growth execution. Also, the analyst feels strong cash generation provides potential for accelerated M&A, which could add circa 5-15% to the valuation..

Jarden expects organic growth from new customer acquisitions, upselling, product upgrades and yearly average selling price increases of 3-5%.

Acquisitions

ReadyTech has made several acquisitions across all segments since listing including; Workforce Solutions (Zambion, Wagelink, Phoenix HRIS); Education & Work Pathways (Avaxa) and Government & Justice (Open Office, Open Windows).

Both Shaw and Partners and Wilsons issued new research in mid-March after the company acquired cloud-based talent management platform PhoenixHRIS. The business provides specialist cloud-based online recruitment management software, with modules including job requisition, video screening, verification and on-boarding.

Shaw considered the transaction an extension of Readytech's all-in-one capability in the stand-up economy, and suggested online recruitment is the next logical step. Meanwhile, Wilsons felt the acquisition should improve win rates in higher-value deals and tenders, and also provide a cross-sell opportunity when combined with Zambion.

The acquisition of Zambion in 2020, explains Shaw, began ReadyTech’s pivot to all-in-one HR software vendor from payroll only.

The most prominent acquisition since listing, according to Jarden, is Open Office, a government and justice case management SaaS provider. This allows access to over 500 local councils of which 75% have legacy solutions from over a decade ago.

February results

During the February reporting season, Macquarie’s earnings expectation was exceeded by 3% due to strong organic revenue growth, underpinned by 97% net customer revenue retention. Other contributing factors were new client wins and ongoing execution of the company's cross-sell and up-sell strategy.

Growth, accelerated by strategic M&A, is expected to underpin a further re-rate for the company’s valuation multiple, suggested the analyst at the time.

The broker has an Outperform rating and 12-month target price of $4.10 for the stock, which suggests 20% upside to the current share price.

Meanwhile, outside of the FNArena database, Goldman Sachs, Shaw and Partners, Wilsons and Jarden all have Buy or equivalent ratings with an average target price of $4.51.

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