Readying For Local Government At ReadyTech

Australia | Jun 23 2022

This story features READYTECH HOLDINGS LIMITED. For more info SHARE ANALYSIS: RDY

Taking a sizeable share of the local government software provision market, ReadyTech has announced the acquisition of IT Vision.

-ReadyTech acquires government software solutions provider IT Vision
-The move makes ReadyTech the market leader in local government
-Acquisition should accelerate Vision IT customers’ path to cloud services

By Danielle Austin

ReadyTech Holdings ((RDY)) has cemented its position as a leading local government software provider with the acquisition of IT Vision. The acquisition is expected to see ReadyTech accelerate the migration of IT Vision’s customers to cloud services.

IT Vision provides an additional 190 local government branches, across Western Australia, South Australia and Queensland, to Readytech’s customer base, with IT Vision’s customer base heavily skewed to the Western Australia market with 118 of its clients based there. Given little crossover with ReadyTech’s existing footprint, analysts note the acquisition will see the latter's local government share increase to 50-55% from a current 25%.

The total purchase price could reach $54.6m, including a $23.1m upfront payment, split evenly between cash and scrip, with a potential further $31.5m earn out based on revenue and earnings margin delivery over 4.5 years.

Acquisition provides cross-sell and up-sell opportunities

Given IT Vision’s customer base, the acquisition offers a number of cross-sell and up-sell opportunities from within ReadyTech’s broader existing product suite, with analysts noting ReadyTech offers IT Vision customers an accelerated path to cloud subscription.

While IT Visions average revenue per customer of $66,000 is well below ReadyTech’s average local government customer spend of $85,000, cross-sell opportunities and cost saving synergies should add value. Analysts also note Vision IT is a lower margin company than ReadyTech, with the former’s current margin of 20% notably lower than the latter’s average 36-38% margin.

While FNArena’s database brokers are yet to update on ReadyTech following the company’s acquisition announcement, Jarden, Shaw and Partners and Goldman Sachs have all issued research reports on the company post transaction. Of these, all are equivalent Buy rated with an average target price of $4.47.

Finding the move strategically sound, Jarden expects the acquisition will be 8.7% earnings per share accretive in FY23, noting this is lower than the mid-teens organic growth rate IT Vision is targeting, and 10.7% accretive in FY24.

Jarden analysts also lifted revenue forecasts 15% in both FY23 and FY24 to account for the acquisition, while earnings margins decline -260 and -210 basis points given IT Vision is a lower margin business. Jarden is Overweight rated with a target price of $4.02.

ReadyTech is a top pick for Shaw and Partners, with the broker noting the acquisition of IT Vision is strategic in that it positions the company as a leading local government software provider.

Shaw and Partners analysts note the acquisition is anticipated to generate $12.5m in revenue and $2.5m in earnings in FY22. The broker has increased its revenue and earnings forecasts 14% and 9-11% for FY23 and FY24 respectively.

Taking into consideration ReadyTech’s proven merger and acquisition track record, Shaw and Partners analysts expect shared synergies to drive additional upside. This broker is Buy rated with a target price of $4.40.

Goldman Sachs, who reinstated coverage on ReadyTech following the acquisition announcement, anticipates the company will continue to make accretive acquisitions and achieve mid-teen [percentage] organic growth.

Goldman Sachs analysts feel the market is yet to credit ReadyTech for its organic growth profile improvement since listing, and likes that the company operates in sound defensive end markets, including local government and higher education.

While ReadyTech continues to trade at a heavy discount compared to peers, Goldman Sachs expects this will narrow as the company delivers on organic growth execution. Goldman Sachs is Buy rated with a target price of $4.60.

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