Company Overview: An ERP Software as a Service (SaaS) company, Technology One Limited (ASX: TNE), is engaged in developing, marketing, sales, implementation, and support of fully integrated enterprise business software solutions. The company is one of Australia's top 200 ASX-listed companies, with offices around six countries. TNE’s software drives more than 1,200 leading corporations, government agencies, and universities. The company was listed on ASX in December 1999.

TNE Details

TNE Rides on Strong Liquidity Position & Acquisition Synergies: TNE has consistently delivered robust results since listing on the ASX in 1999, owing to its clear vision, strategy, culture, and massive investment in R&D.

Key Focus Area on FY21 Results:

• Rise in Revenues: In FY21, the company’s revenue went up by 4% on pcp and came in at ~$312 million. The rise was aided by continued growth in its global SaaS ERP solution. Notably, SaaS Annual Recurring Revenue (ARR) grew by 43% year over year. The company added ~100 enterprise customers in FY21 to its global SaaS ERP solution and currently has ~637 large-scale enterprise customers. Notably, the total ARR in FY21 came in at $257.5 million, depicting a rise of 16% on pcp.
• Robust Customers Base: In FY21, the company continued to witness new and large enterprise customer wins from its competitors. More than 30 organisations replaced TNE’s competitors’ systems during the period, incorporating systems from Oracle, Microsoft, SAP, Tribal, and Workday. The company completed 20 major deals with more than $25 million in total contract value in the local government sector. In the APAC region, the company has over 300 council customers. With a robust customer base, the company expects strong growth in the future and anticipate doubling in size in the next five years.
• Increase in Profit Before Tax: In FY21, profit before tax stood at $97.8 million, representing a rise of by 19% year over year, owing to continuing fast growth of TNE’s global SaaS ERP solution. Notably, SaaS & continuing business revenue went up by 9% on pcp.
• Higher Investments: During FY21, the company invested $77 million in R&D, as the company is undertaking opportunities to invest in new exciting ideas and innovations, including its new Digital Experience Platform for Local Government and Higher Education. An enhanced focus on R&D is expected to aid TNE in expanding its Global SaaS ERP solution capabilities.

Key Financial Trend; Analysis by Kalkine Group

Acquisitions & Liquidity Highlight:

• Scientia Acquisition: The company completed the buyout of Scientia Resource Management Limited (Scientia) in September, which positively impacted TNE’s FY21 profit. With this acquisition, TNE is now able to focus on the deepest functionality for Higher Education, thus accelerating TNE’s growth strategies and strengthening its competitive position in the UK and the Australian Higher Education market.
• Cash & Debt Position: The company exited FY21 with a cash balance of $142.9 million, up ~14% on pcp. At the end of the period, Net assets amounted to $190.2 million, up 34% on pcp. The company has a strong balance sheet with net cash operating inflows of $114.9 million in FY21, up from $103.5 million in FY20, thus helping TNE to attain its long-term objectives and pursue strategic acquisitions. Notably, the total dividend in FY21 came in at 13.91cps, up 8% on pcp.

Key Metrics: For FY21, the company reported an EBITDA margin of 40%, higher than the year-ago figure of 34.1%. In FY21, the company recorded cash cycle days of negative 172 compared to the industry median figure of negative 20.2 days

Growth, Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 40.98% of the total shareholdings, while the top 4 constitute the maximum holding. Mactaggart (John Dugald) Limited held the maximum number of shares with a percentage holding of 8.33%, followed by Fundsmith LLP holding 5.83%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Loss of key Customers: The company’s financial performance might get impacted by caution in buying behaviour. Also, change in customer preference and supplier concentration risk adds to the woes.
• COVID-19 Led Uncertainties: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions.
• Stiff Competition: The company is exposed to stiff rivalry from competitors developing similar product lines and services.
• Cyber Hacks: The ongoing digital transformation and abundance of smart connected devices supported by artificial intelligence, & machine learning is exposing vulnerabilities in security systems globally, which exposes the company to cyber-security risk.
• Increase in Expenditure: The company is spending more on research and development to embrace new technologies, new concepts, and new paradigms. This might limit margin growth in the future.

Outlook: The company expects continued strong growth in SaaS ARR and profit in FY22 and beyond. It anticipates annual recurring revenues to increase to over $500 million by FY26. By FY24, the company expects total business to expand by 15%+ per annum and predicts ~90% of all its remaining On-Premises customers to move to TNE’s SaaS solution, driving the growth of its SaaS business. In addition, the company anticipates R&D growth over the next few years to return to the benchmark growth of 8% or less, with opportunities in both UK and Australian market.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~17.96% in the past three-months. Currently, the stock is trading slightly below the average of its 52-week high and low levels of $13.6 and $8.15, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peers, considering integration risk, rising expenditure, cybersecurity risk, loss of key customers, etc. For the purpose of valuation, peers such as Altium Ltd (ASX: ALU), Nitro Software Ltd (ASX: NTO), Readytech Holdings Ltd (ASX: RDY) and other have been considered. Considering decent liquidity position, higher revenue base, positive outlook, increase in customer base, synergies from acquisition, current trading levels, and upside in valuation, we recommend a ‘Buy’ rating on the stock at the closing market price of $10.31, down by ~2.368% as on 11 February 2022.

TNE Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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