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TechnologyOne’s SaaS Transformation ‘Complete’

Australia | Jun 08 2022

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

TechnologyOne stands out as a low risk, reliable performer with a proven track record and plenty of growth ahead in today's beaten-down technology sector on the ASX.

-TechnologyOne recently booked 13th year of record half-yearly profits
-SaaS revenue jumped 44% in the first half of FY22
-Profit margins expected to expand with further customer wins
-Analysts overwhelmingly back management’s optimism about future growth

By Nicki Bourlioufas

With 97% of total revenue now coming from Software as a Service (SaaS) and continuing businesses, TechnologyOne ((TNE)) say its transformation is “complete” with strong sales having underpinned another record first half profit.

Analysts at stockbrokers share company management’s optimism and are upbeat on the future, with its shares having outperformed key competitors during a time when technology stocks on the ASX are heavily out-of-favour.

TechnologyOne provides enterprise resource planning (ERP) software. Competition in the sector is high, with main competitors including large multinationals such as Oracle, SAP and Workday.

Nevertheless, TechnologyOne enjoyed a jump in fees for the half year ended 31 March 2022 and similar growth is expected in the second half.

Profit after tax rose 18% to $33.2m, its 13th year of record first half profit, underpinned by strong demand for its TechnologyOne global SaaS ERP solution. SaaS annual recurring revenue (ARR) jumped 44% to $225.1m.

TechnologyOne CEO, Edward Chung said the strong half year result validates the strength of the company’s SaaS strategy.

Its purchase of higher education software provider Scientia will drive growth in higher education both in the UK and Australia in addition to strong organic growth.

The company attracted nineteen large scale enterprise customers in the UK, Australia and NZ in the first half. Chung said profit margins will expand as the company wins more SaaS customers globally.

On the negative side, group profit before tax (PBT) margin fell around -1% to 25%, largely driven by the purchase of Scientia, which reported a 6% PBT margin compared to Technology One’s 26%.

The company expects its key margins to remain flat in FY22, before expanding in coming years.

TechnologyOne shares are up 24.5% over the year to 6 June 2022, compared to a drop of -13.1% for the Nasdaq Composite Index and falls in the prices of key competitors Oracle (-13.1%), SAP, down -18%, and Workday, down -29%, amidst rising bond yields and interest rates.

This is not to suggest the shares have been immune from the broader sector fall-out. TechnologyOne shares reached an all-time high in November last year, at $13.50.

More gains seen for TechnologyOne

Bell Potter thinks the shares are undervalued. The broker has a Buy recommendation on the stock with a price target of $12.75, a large premium to its market price of around $11.

Bell Potter notes TechnologyOne’s annual profit growth target of 10-15%, adding “we believe there is potential for the company to lift this annual target to +15-20% at some stage in the next few years.”

Morgans too has an ‘Add’ on the stock and says its SaaS transformation has been seamless.

Typically, points out the broker, a transformation of this nature comes with a lot of pain but TechnologyOne is believed to have navigated the transition “incredibly well”.

With revenue growth expected to accelerate earning per share (EPS) growth, Morgans has a target price on the stock of $11.53.

Goldman Sachs too has lifted FY22-24 revenue estimates by 3 to 5%. However, its price/earnings (P/E) multiple has reduced to 23.5x (versus 25.0x prior), which reduces the price target to $13.30/share from $13.90.

This hasn’t stopped Goldman Sachs from reiterating its ‘Buy’ recommendation. The broker highlights the company has a sticky customer base “with high recurring revenue and expanding margins (post FY22) providing visibility into medium-term earnings growth.

With a potentially challenging macro backdrop on the horizon, the broker sees TechnologyOne offering a resilient earnings profile underpinned by low customer churn, mission critical software and defensive public sector end markets.

Wilsons notes the first-half result highlights both the non-discretionary and a-cyclical nature of the business.

Wilsons retains an overweight rating on the stock, though has lowered FY22-FY24 forecasts by -4% to -5%, reflecting higher costs including depreciation following its acquisition of Scientia. As a result, its target price has reduced by -8% to $11.08.

Shaw and Partners is even more upbeat and suggests the company's low risk profile in combination with the current valuation make TechnologyOne shares look attractive.

Thus, Shaw has reiterated its Buy rating with a price target of $12.10. Shaw points out the company’s earnings before interest, taxes, depreciation, and amortisation EBITDA multiple of 32x puts it at the low end of its historical range (32x-42x).

This makes Macquarie a stand-out with only a Neutral call on the stock. Macquarie notes the key downside risk to its target price of $11.00 would stem from TechnologyOne’s SaaS business materially missing forecasts.

Bell Potter believes more risk is related to the huge size of competitors such as Oracle, SAP, Infor and WorkDay who all have large marketing and R&D budgets and a huge global presence.

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