Small Caps | Nov 27 2012
– Technology One delivers solid full year profit
– Margin progression a positive in tough market
– Capital management still expected
By Chris Shaw
Technology One ((TNE)) delivered a full year net profit after tax of $23.6 million, an improvement of almost 16% relative to FY11 and slightly better than guidance from management for an increase of 10-15%.
The result was helped by a lower tax rate, but UBS suggests the fact operational results were only slightly lower than had been forecast was a solid performance given the current tough economic environment.
One disappointment was the lack of any special dividend, UBS attributing this to an additional tax concession applied to research and development. This had the effect of reducing Technology One's franking balance, so making a special dividend less attractive.
Given a strong balance sheet BA Merrill Lynch expects some capital management initiatives in the future. Without any special dividend in FY13, Technology One is still forecast by UBS to offer a yield of nearly 6%, 100% franked.
For BA-ML, a key positive in the Technology One result was clear progression in margins, this as research and development as a percentage of sales fell during FY12. This supports a solid earnings outlook in BA-ML's view, especially given the company has a relatively strong pipeline of work going forward.
UBS agrees Technology One has made progress both on margins and its cost base, but remains cautious with respect to the medium-term outlook given the potential for contract delays in what remains an uncertain environment in terms of business capex.
To account for this UBS has trimmed earnings estimates in coming years, this as lower initial licensing fee growth and higher distribution and market costs are allowed for in the broker's model. On the plus side, UBS continues to expect Technology One will grow at above market rates given increased market share, growth in new modules and improved profit metrics as R&D falls.
UBS's revised earnings per share (EPS) forecasts for Technology One stand at 8c in FY13 and 9c in FY14, while BA-ML expects outcomes of 8.1c and 9.4c respectively. Consensus EPS forecasts according to the four brokers in the FNArena database covering the stock stand at 8.3c and 9.4c.
Revisions to its numbers have seen BA-ML lift its price target for Technology One to $1.59 from $1.57, while UBS has made a more significant increase and moved its target to $1.50 from $1.30. The consensus price target according to the FNArena database has risen to $1.37 from $1.32 previously.
The database shows three Buy ratings and one Hold for Technology One. Both BA-ML and UBS see enough value to maintain their positive views, this as operating leverage begins to come through and as the company is still expected to deliver better than market growth.
Shares in Technology One today are slightly higher in a stronger overall market and as at 12.45pm were up 2c at $1.41. Over the past year the stock has traded in a range of $0.93 to $1.425, the current share price implying modest downside relative to the consensus price target in the database.
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