Quality By Any Objective Measure

This story features OBJECTIVE CORPORATION LIMITED. For more info SHARE ANALYSIS: OCL

New research on Objective Corp highlights potential share price upside from a suite of products focused on managing increasing data and regulatory burdens for governments and enterprises.

-New research sets an aggressive target price for Objective Corp
-The ongoing SaaS transition results in growing recurring revenues
-Indicating a healthy SaaS business, Objective meets the Rule of 40
-FY24 results and the international opportunity

By Mark Woodruff

Governments across the globe are increasingly using technology to provide transparency and build community confidence, while private organisations generally are faced with managing mountains of data and regulatory burdens, all of which offers opportunities for Objective Corp ((OCL)).

New research by broker Moelis sets a 12-month target price of $17.60, more than 20% above the $14.46 average of three covering brokers in the FNArena database.

At all levels of government, statutory authorities and regulated businesses have use cases for the company’s software solutions, notes the broker.

Morgans describes Objective as a best-in-class enterprise software business specialising in Enterprise Content Management (ECM) for the public sector, as well as highly regulated industries across A&NZ and the UK.

The company designs, develops, installs, and supports its own proprietary software, which encompasses document management, imaging, records management and workflow.

Other software uses include regulatory compliance management and boosting collaboration capabilities, as well as software for streamlining planning, building and approval for construction projects.

Recurring revenue has continued to grow as a proportion of total revenue, rising to 81% of total revenue in FY24, while the business steadily transitions to SaaS services from on premise licence sales.

Indicating strength of customer relationships as well as management’s experience, Objective has continued to grow revenue and earnings in a competitive segment, highlights Moelis.

Also singing the praises of Objective, following FY24 results on August 22, the analysts at UBS noted a long-term track record of compounding cash earnings, a market leading position, sticky recurring government-exposed revenue, low customer churn and a very strong net cash balance sheet.

Joining rarefied air for technology companies, the stock clears the Rule of 40 hurdle, which requires the sum of revenue growth and free cash flow (FCF) margin to exceed 40%.

Objective also earns its high-quality status by ticking off the internal UBS requirement for a 10% internal rate of return (IRR). 

The FY24 highlight for UBS concerns the incremental cash EBITDA margin of 60% generated on SaaS revenue, which drove a 200bps margin expansion to 26.3%. 

Largely due to this margin outcome, UBS raised its target by 6% to $15.00, and upgraded its rating for Objective to Buy from Neutral.

Operating cash conversion remained strong in FY24 at greater than 100%, which saw the business deliver free cashflow of $38.1m, resulting in a closing cash balance of $96m. The FY24 dividend rose by 26% year-on-year.

Large-scale M&A is proving challenging and may become less of a focus for the near-term, noted Shaw and Partners.

Management has investigated several opportunities over the past year, but a sensible transaction has proven elusive in a private equity fuelled technology market, particularly in the US.

While Shaw is satisfied with Objective’s “significant” organic opportunities, the prospect of a beachhead entry into the US is potentially exciting but would also increase overall risk.

International reach

The increasing requirement for organisations to assess and invest in information governance has been demonstrated by recent General Data Protection Regulation (GDPR) in the EU, points out Moelis.

The aim of GDPR is to make organisations accountable for the security of all personal data they store, which should provide an opportunity for Objective.

By way of example, Moelis cites the recent contract with the UK Gambling Commission won by Objective’s RegWorks, the core of the Regulatory Solutions division.

Objective 3Sixty is a newer service, which is also suited for expansion into new markets. In fact, a focus on privacy protection was described by management at FY24 results as driving an “enormous number of opportunities” for 3Sixty.

This service, which sits within the Content & Process division, allows customers to view and govern information across multiple content repositories.

Reasons for share price underperformance and FY24 results

At the time of FY24 results in August, UBS noted the stock price had traded sideways over the past three years resulting in a material de-rating for the trading multiple,

This share price malaise was due to management again failing to meet annual recurring revenue (ARR) growth expectations of at least 15% per year, suggested the analyst.

Only 11% ARR growth was registered in FY24, missing the 13% consensus forecast, yet (unlike on prior occasions) the stock price managed to react positively, leading UBS to suggest market expectations have rebased to a range of between 10-12% ARR growth, in line with the broker’s own forecasts.

UBS suggests such a recalibration of expectations now allows the market to focus on Objective’s operating leverage or incremental margins.

Regarding market expectations, Goldman Sachs disagreed with UBS’s assessment, noting 15% ARR growth is broadly factored into forecasts and represents a risk should FY25 ARR fail to reach management’s target.

Speaking of such, management reiterated the 15% target for FY25 based on landing at least two significant deals (which failed to materialise in FY24), positive underlying momentum in each business line, and reinvestment in organic growth and product.

Due to recent contract wins, the company also flagged a step-up in Services revenue to support new customers into FY25.

Preferring to err on the conservative side, Morgans forecasts 13.3% ARR growth in FY25 due to the risk of future deal slippages. Based on valuation, this broker downgraded its rating to Hold from Add.

Goldman Sachs noted a potential ARR tailwind in FY25 from accelerating momentum in the Nexus on-premise-to-cloud transition for the company’s legacy ECM customer base. 

Of the three brokers monitored daily researching Objective in the FNArena database, both UBS and Shaw and Partners have Buy ratings and Morgans is on Hold.

The average target of these three brokers is $14.47 which suggests just over -5% downside to the closing share price on October 3.

Outside of daily coverage, Moelis is freshly Buy-rated on Objective and Goldman Sachs has a Neutral rating with targets of $17.60 and $13.75, respectively.

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