Rudi’s View: It’s Special vs Cheap, But Who’s Most At Risk?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | May 29 2024

It's Special vs Cheap, But Who's Most At Risk?

By Rudi Filapek-Vandyck, Editor

From the moment one starts looking for that 'special' corporate quality on the ASX, it is but a matter of time before the focus zooms in on IT services provider TechnologyOne ((TNE)).

Last week's interim financial update provided plenty of input as to why this Brisbane-headquartered, $5.7bn market capped member of the ASX100 is hands down one of the highest quality companies listed on the local exchange.

Rather than dissecting the finer details from the H1 financials, not necessarily all positive, I think it is of much greater importance to explain, in broad terms, what makes this local gem of such high quality.

It might help others, like you maybe (?), to understand what exactly makes this company so special, which might also help in discovering other 'special' companies or rejecting their claims to similar greatness.

An Exceptional Track Record, What Is The Secret Sauce?

In a world that is eagle-eyed focused on growth, TechOne's track record has been exceptionally consistent, growing earnings per share at around 15%, year-in, year-out. It was this consistency that attracted the attention of a short report in 2020, claiming management surely was cooking the books, because, well, no company is able to grow at such consistency for such a prolonged time.

Well, it's 2024 now, and TechOne's still doing it. That malicious short report is long forgotten about, and the share price recently rallied to a fresh all-time record high, intra-day, above $18. When the shorters stood ready to attack in 2020, the price temporarily sank below $8.

The share price, up from below 50c in 2004, is only what is visible to investors every day. The real story that lays underneath is the business approach that prioritises building close relationships with customers, and then making certain the service and products provided suit their needs.

In the fable of the hare and the tortoise, TechOne very much resembles the tortoise. Growing 15% per annum doesn't seem extremely appealing when others can do 100% and more, but can they do it consistently over two decades? TechOne has, and the market has increasingly been paying attention.

When a company grows at a pace of 15% per annum, it doubles in size in less than five years. By 2009, that share price was ready to surpass $1. By 2014 it was trading above $3. By 2019 the price was above $7. At last week's interim release, management gave indications growth is likely to accelerate in the coming years.

Analysts, or at least most of them, got the message and are now projecting 17% EPS growth for the years ahead. Some continue to see potential for further upside surprises, in particular since the UK business hasn't genuinely started contributing just yet. The magic ingredient of the TechOne business achievement is customers are increasingly happy to purchase more products from the same company.

What is usually pointed out about TechOne, including by myself, is its customers, mainly local governments and higher education institutions, are extremely "sticky" with last week's published churn percentage of 1.8% somewhat of a shock. History sees this percentage seldom rise above 1%. Don't worry, management is confident that number will be back below 1% shortly.

TechOne is far from the only company that can rely on customer loyalty, but it has been able to turn that loyalty into a sustainable platform for growth by selling existing customers more products. Not sustainable, I hear you say? Management remains confident there's still a lot more that can be achieved from the same database of prospects and existing customers.

Consistent Investing Builds Success

There's an easy argument to be made the real growth driver stems from the company investing circa one quarter of its revenues in new product development and improved services year-in, year-out. It's these new products that lift the take-up among existing customers.

It's not difficult to see here is a circle of trust at work and TechOne does enjoy a positive reputation in its core markets, also illustrated by the fact the company seems to have established itself as provider of the highest level of cybersecurity among ERP peers in Australia; not an unimportant halo to wear when dealing with government and local councils.

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