1. Sector landscape and outlook

COVID-19 has wreaked havoc across the globe, derailing many businesses. However, Tech businesses have unequivocally sailed through COVID-19 turbulent wave and in many cases have reinforced their use case even further; be it offerings such as video chat services, automation of devices, cloud computing, contactless payment, e-gaming, and e-learning.

The S&P/ASX 200 Information Technology index hit its all-time high of 1,741 on 10 July 2020, in fact from the March lows the index has more than doubled. The home-grown technology market darlings, WAAAX stocks have also put on astonishing gains and weathered the storm successfully to a large extent.

Figure 1) WAAAX Performance

Source: Kalkine and ASX

Australians are harnessing emerging new technologies to boost their existing businesses, create new products and markets, and enrich daily life. As per a report by Data61, the improvements to the existing industries and growth of budding ones could be worth $315 billion to the Australian economy over the next decade.

Furthermore, the Australian Information Industry Association (AIIA) believes that there would be a surge of 100,000 in the tech workforce by 2024.

This digital era has reshaped the Australian businesses across various sectors.

The Australian economy has witnessed a paradigm shift from a resource to a services-based economy. This transition has unfolded numerous opportunities across multiple sectors such as advanced manufacturing, services, health, financial services, agriculture, infrastructure, and resources and energy.

Figure 2) Technology Powering Industries of Future

Source: Kalkine

Of late, the technology space has garnered spotlight, well placed to assist the sluggish businesses in their technological leap and underpin new lifestyle and work culture.

The COVID-19 pandemic has further cemented the importance of adopting technology into one’s business, and the management teams across various sectors are now looking at ways and means to use technology to leverage as they enter into the new world that is influenced and shaped by the unprecedented COVID-19 pandemic.

Now let us familiarise ourselves with the latest trends emerging in the technology space.

Emerging Trends in the technology space:

Figure 3) New Trends in Tech

Source: Kalkine

The new age technological advancement is all set to add to the economic value and job creation across the country.

• In one of its reports, AlphaBeta had estimated that automation, utilising the power of machines to execute tedious and less valuable tasks, could considerably enhance the productivity and national income of Australia, by $2.2 trillion by 2030.
• When the Quantum technology is broken into sectors, CSIRO expects generation of $2.5 billion and 10,000 jobs in the computation, and $8 million and 3,000 jobs in communications and $9 million and 3,000 jobs in sensing and measurement.

Let us appraise ourselves with two of the digital trends within the tech sector:

FinTech: Financial services industry has witnessed a transformation with the implementation of digital technology. FinTech in Australia is bolstered by high mobile phone penetration, Artificial Intelligence (AI), high contactless payment penetration, investment management businesses, blockchain capabilities, regulatory framework etc. Iress Limited (ASX: IRE) is providing IT solutions to financial market participants across the globe.

Moreover, an Australian domiciled entity, QuickFee Limited (ASX: QFE) has gained from the pandemic induced behavioural shift in consumers while making any payments.

QFE is an online payment solution, which enables clients of companies using QFE platform to take on financing for bills produced by a firm, along with payment of bills through EFT or credit card.

Source: FinTech Australia

Cloud Computing: In the last couple of years, cloud services have triggered innovation for Australian businesses. Cloud services are improving business models, facilitating a more innovative and dynamic way of working. Further, various traditional businesses are now accelerating and shifting to this technology as it offers benefit in the form of cost efficiency, scalability, flexibility, and remote accessibility.

Amid pandemic, businesses have swiftly adopted a work-from-home approach; more workloads would be migrated to the cloud to ensure that businesses function without any hiccups.

Moreover, cloud computing has opened up its power to small businesses as the cost of cloud services differs with the frequency and usage volume, empowering flexibility in operational costs and the ability to scale as required without paying any additional amount for maintaining any spare capacity.

Xero Limited (ASX: XRO) is one of the cloud-native unicorns that has gone global. Even on the global front, we are seeing the business titans from the could computing space invest heavily and making inroads to more innovations. RHIPE Limited (ASX: RHP) offers Microsoft Indirect Cloud Solutions Program (CSP) program in Australia.

Figure 4) Global Could Computing Developments

Source: Amazon, Google Cloud

Having established the growing need for businesses to adopt technology to make strides in the future, let us now shift our focus and gauge how the Government is supporting the growth of the tech sector.

Government Initiatives to drive radical technological upgradation:

The Government of Australia focuses on the acceptance and investment in technological improvements. The Government has partnered with Germany for an increase in trade and investment, information sharing, cooperation in education and science and strategic dialogue.

Commonwealth of Australia also handles testlabs program that plans to prepare businesses and support them to shift into smart factories for the near future. For the meantime, the Australian Government has highlighted manufacturing, food and agribusinesses, cybersecurity, pharma and medical tech, oil gas and energy resources and mining equipment tech and service.

Government of Australia has announced plans to invest $2.4 billion in world class supercomputers, the space agency, GPS, satellite imagery, meteorology and research in AI. Further, the Government handles R&D tax incentive plans and entitled firms with revenues of less than $20 million secure a tax offset, which is refundable, and other qualified businesses secure a non-refundable tax offset.

Lastly, the Government of Australia is partnering with India on research and science via the Australia India Strategic Research Fund (AISRF). The primary sectors include astronomy and astrophysics, information and communication technology, nanotechnology, clean energy technologies and agriculture.

Let us now look at the challenges/risks posing the technology sector.

Challenges in technological growth: Though Australia looks well prepared, there are numerous challenges that it must overcome to capitalise on its digital strength and facilitate the long-term growth of the digitally enabled businesses. Few of the challenges are:

• The technology industry is in search of extremely trained and competent personnel with varied capabilities and the challenge for Australians is to build those skills required to evolve with jobs as they change.
• With the advent of new technology, the current technology becomes obsolete; requiring additional capital to harness the latest technology.
• The straightening of the Australian dollar could be a big headwind for the export ordinated tech businesses.
• Delay in the deployment of 5G could lead to slowing down of technology adoption and innovation.

The Australian technology sector is in a sweet spot with more focus now shifting towards the adaptation of technology across various industries, as the pandemic has reshaped the way businesses owners/operators think of technology. The tech sector has experienced minor hiccups during the pandemic, as structurally, many of the tech businesses were well placed to quickly adapt to situations that entail working from home. It will not be an exaggeration if we stick out our neck and state that the technology sector has indeed grown stronger post the COVID-19 pandemic challenges.

2. Investment theme and stocks under discussion (HSN, IRE, RHP and CPU)

After understanding the recent trends in the industry, let’s now look at four players from the industry those are listed on the Australian Stock Exchange. To assess the same, companies’ stocks are evaluated based on ‘Price/Sales’ methodology.

 

1. ASX: HSN (HANSEN TECHNOLOGIES LIMITED)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap – A$ 555.1 million)

Hansen Technologies Limited is engaged in the development, integration, and support of billings systems software for the telecommunication and utility industries.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~16% on 16 July 2020 closing price. We have considered DATA#3 LIMITED (ASX: DTL), THE CITADEL GROUP LIMITED (ASX: CGL), and LINK ADMINISTRATION HOLDINGS LIMITED (ASX: LNK) etc., as a peer group for the comparison purpose.

2. ASX: IRE (IRESS LIMITED)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap – A$ 2.1 Billion)

Iress Limited is engaged in offering software to the financial services industry.

 

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~18% on 16 July 2020 closing price. We have considered TYRO PAYMENTS LIMITED (ASX: TYR), BRAVURA SOLUTIONS LTD (ASX: BVS), and LINK ADMINISTRATION HOLDINGS LIMITED (ASX: LNK) etc., as a peer group for the comparison purpose.

 

3. ASX: RHP (RHIPE LIMITED)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap – A$ 294.9 Million)

Rhipe Limited is engaged in the sale and support of subscription software licenses to ~3,000 IT service provider throughout the Asia Pacific region.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~18% on 16 July 2020 closing price. We have considered HANSEN TECHNOLOGIES LIMITED (ASX: HSN), LIMEADE, INC (ASX: LME), and CODAN LIMITED (ASX: CDA) etc., as a peer group for the comparison purpose.

 

4. ASX: CPU (COMPUTERSHARE LIMITED)

(Recommendation: Hold, Potential Upside: High Single Digit, Mcap – A$ 7.31 Billion)

Computershare Limited is engaged in the provision of investor services, employee share plan services, business services and communication services.

Valuation

Our illustrative valuation model suggests that the stock has a potential upside of ~8% on 16 July 2020 closing price. We have considered CHALLENGER LTD (ASX: CGF), PERPETUAL LTD (ASX: PPT), and LINK ADMINISTRATION HOLDINGS LIMITED (ASX: LNK) etc., as a peer group for the comparison purpose.

Note: All the recommendations and the calculations are based on the closing price of 16 July 2020. The financial information has been retrieved from the respective company’s website and Refinitiv, Thomson Reuters.

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