Rudi’s View: Aussie Banks & TechOne

Rudi's View | 10:00 AM

In today's update:

-TechnologyOne
-Aussie banks
-Conviction Calls and Best Buys

By Rudi Filapek-Vandyck, Editor

I had to look it up, as the human memory is not 100% reliable when it comes to exact details: the last time TechologyOne ((TNE)) shares traded near $10 was in 2022.

The timing is important because that was the moment when one of the local value investors published a blog about this ASX-listed wealth creator and argued the numbers simply did not stack up.

There was no way in which owning the shares at that lofty level was ever going to be positively rewarded. The numbers were proving it. You'd have to be extremely deluded to not sell and move onto cheaper alternatives.

Hold that thought.

About one year later, we're in the second half of 2023 now, TechOne shares are hovering around $15.50 and yet another expert voice declares on financial TV: short the stock, it's over-priced.

Today, Wednesday July the 31st in 2024, as I am writing these sentences, the shares have surpassed $20, inspired by a rally post detailed investor briefings on the day prior.

Seldom have I ever truly understood Peter Lynch's advice that you should know what you own in the share market, and why you own it.

There's equally a lot of wisdom in these words for investors who listen to expert voices through financial media: one-size fits all comes in extremely handy when one needs to look smart and knowledgeable, but it's seldom accurate because companies are not equal to each other, and some are a lot more equal than others.

I own TechOne shares because this is a company investors can rely on to double in size every five years, on average, and the past two decades have proven exactly that. As a matter of fact, and as the short timeline above suggests, investment returns for loyal shareholders have been a lot better than the average of 14.87% per annum (which is the reward for 100% upside over five years).

Here's another invaluable piece of wisdom for investors: quality companies tend to outperform expectations.

I had no idea the reward for owning TechOne shares in 2022 was 100% return in two years. And still, I am not selling. If for some reason the Nasdaq melts down in September and sellers abandon the stock to preserve their profits, and the shares unexpectedly tank, I will be on the look-out to buy more.

This growth story is still nowhere near the finish line. To understand this, one must ignore the regular occurrences of accidents and lucky streaks experienced by the lower-quality alternatives on the ASX. Companies like TechOne are like Ronaldo and Messi on the world stage, or Djokovic in tennis, or the All Blacks; they don't win every time, but you should not bet against them.

So, what is this latest rally all about? In essence, management at the helm is convincing analysts that, contrary to views expressed by Morgan Stanley and Morningstar, TechOne is not just a plain ordinary software services provider that has nothing special to offer its database of clients.

This week's bout of enthusiasm follows on from management's crucial decision last year to launch something that makes TechOne unique in its industry, worldwide. The product itself is called SaaS-Plus. I won't bother you with the boring details, but the novelty in this offering to new clients is that TechOne takes on board the risk and costs for installing and implementing its software solutions.

This is a big deal. In a lot of cases there are delays, cost overruns, budget blow outs, you name it. TechOne is strategically removing the initial barrier for new customers by making it less cumbersome and cheaper to come on board. The benefit comes over the subsequent years as those initial costs are added onto the annual licensing fees.

As the company stays within its circle of competence, even as it is developing new growth avenues in the UK, it's not difficult to understand where its comfort stems from. Historically, customer loyalty sits above 99%, so it's not too difficult to see the accumulating benefits long into the future. Management has always been very clear about its strategy: get the customers on board, keep them happy, then sell them more products.

It has worked for more than twenty years. We all know what 'they' say about a winning formula.

Part of the additional attraction is not only that further growth appears to be secured at the top line, and some analysts are now suggesting this new SaaS-Plus offering might well accelerate the onboarding of new customers, but margins could well rise more than previously expected.

RBC Capital, for example, is now modeling a gross-profit margin (profit before tax) of 38.6% by FY30 instead of the previously projected 36.8%. For those who understand the multiplying effect of mathematical modeling, the importance of that additional 1.8%point on top of higher sales needs no further explanation.

One day after attending the investor briefings, RBC Capital has upgraded its rating to Outperform with an upgraded target of $24, up from $20 previously. If somehow management is able to still outperform on revised forecasts, RBC can see that target rising further to $29.

There were other positives in this week's presentations, and you might read about them in the coming days, but I think the above summarises the core of the investment thesis in TechOne. Is there no chance they might fail? That risk is always present. But just like in the world of sporting giants, when you discover exceptional talent, you don't bet against it.

(You can leave that to your typical value investor who still doesn't understand why the numbers at half today's share price weren't telling the full story).

Goes without saying, TechOne is included in my personal research into All-Weather Stocks. It is a core holding for the FNArena-Vested Equities All-Weather Model Portfolio.

Paying subscribers have 24/7 access to my research via a dedicated section on the website: https://fnarena.com/index.php/analysis-data/all-weather-stocks/