Stocks’ Details

TechnologyOne Limited

Adverse Judgement Passed by Court: TechnologyOne Limited (ASX: TNE) is involved in the development, marketing, sales, implementation, and support of fully integrated enterprise business software solutions. The market capitalisation of the company stood at $2.81 Bn as on 3^rd November 2020. Recently, the company has noted an unfavorable judgement, which has been passed by Justice Kerr in the case of Behnam Roohizadegan vs TechnologyOne. As per the judgement, the company is liable to pay a sum of around $5.2 million. The company added that the applicant was an executive, who was responsible for its Victorian business. However, the company is planning to take this matter on appeal in the Full Federal Court.  

1H FY20 Financial Highlights: For the half-year ended 31^st March 2020, the company recorded a growth of 7% in topline (revenue), which amounted to $138.4 million. In addition, TNE’s SaaS business continues to grow and reported Annual Recurring Revenue of $110.2 million, reflecting a rise of 33% as compared to 1H FY19. The company noted profit after tax of $19.1 million, which went up by 6% over pcp. This was supported by strong demand for the TechnologyOne Global SaaS ERP Solution. In order to retain shareholders, the company paid a half-year dividend of 3.47 cents per share, which was franked to 60%.

Segment Wise Profit (Source: Company Reports)

Outlook: In the 1H FY20 earnings release, the company expected profit growth of 8 % to 12% for FY20. However, as a result of the judgement passed by the court, TNE now anticipates profit to be at the lower end of guidance. In addition, the company is expecting to increase its total Annual Recurring Revenue to over $500 million by FY24. The company has scheduled to release its FY20 earnings on 24^th November 2020.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company ended 1H FY20 with a healthy balance sheet supported by an increased cash balance of $83.8 million and nil debt. In addition, the company possesses a strong pipeline and a high proportion of locked-in recurring revenues. The stock of TNE is trading at a P/E multiple of 48.2x as compared to the industry average (Technology) of 8.3x on TTM basis. In addition, the stock is trading towards its 52-week high level of $10.260. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price with limited upside (in percentage terms). For the purpose, we have taken peers such as WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX) and Over The Wire Holdings Ltd (ASX: OTW), to name a few. On a technical front, the stock of TNE has an immediate support level of ~$8.304 and a resistance level of ~$9.263. Thus, considering the current trading levels and valuation, we are of the view that most of the positive factors have been discounted at the current trading levels. Hence, we give an “Expensive” rating on the stock at the current market price of $8.870 per share, up by 0.453% on 3^rd November 2020. We further suggest investors to wait for better entry levels.

Integrated Research Limited

Decent Growth in Top-line and Bottom-line: Integrated Research Limited (ASX: IRI) is engaged in the development, designing, execution and sale of systems and applications management computer software. The market capitalisation of the company stood at $597.44 Mn as on 3^rd November 2020. During FY20, the company reported a rise of 10% in total revenue to $110.9 million and sales of new licence soared by 15% to $72.1 million. IRI reported net profit after tax of $24.1 million, reflecting a rise of 10% over pcp. In addition, FY20 proved as 7th consecutive year of annual profit growth. These strong results showcase the strength of the company’s business model with a geographically diversified Tier 1 customer base as well as revenue split across three primary product lines (Unified Communications (UC), Payments and Infrastructure).

Revenue (Source: Company Reports)

Outlook: Going forward, the company continues to make investments in research and development with an objective to ramp up innovation and the expansion of its value proposition for customers across the globe. The company added that the steep rise in call volumes, meeting minutes, as well as online and credit card transactions are likely to play an excellent contribution to the core strengths of the company. The company has scheduled to conduct its 2020 Annual General Meeting on 24^th November 2020.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company maintained a strong financial position comprising a net cash position of $4.7 million as on 30^th June 2020. In the past six months, the stock has provided a return of 12.97%. On a technical front, the stock of IRI has an immediate support level of ~$3.364 and a resistance level of ~$3.880.  We have valued the stock using the price to earnings multiple based illustrative relative valuation method and arrived at a target price with an upside of high single-digit (in percentage terms). For the purpose, we have taken peers such as Infomedia Ltd (ASX: IFM), Iress Ltd (ASX: IRE) and Citadel Group Ltd (ASX: CGL). Therefore, considering the decent growth in top-line and bottom-line, focus on future investments and net cash position, we give a “Hold” recommendation on the stock at the current market price of $3.470 per share as on 3^rd November 2020. 

Gentrack Group Limited

A Look at 1HFY20 Performance: Gentrack Group Limited (ASX: GTK) is engaged in the designing, development, implementation, and support of specialist software solutions for energy utilities, water companies and airports. The market capitalisation of the company stood at $109.49 Mn as on 3^rd November 2020. Recently, the company announced the appointment of Andy Green CBE as Chair of its Board of Directors. During 1H FY20, GTK recorded revenues amounting to NZ$50.6 million, reflecting a fall of 7% as compared to 1H FY19. This indicates loss of various UK customers as a result of supplier failure or acquisition, as well as a fall in non-recurring revenue in the UK and Australia. In addition, the company reported committed recurring revenue of NZ$29.7 million, indicating a rise of 11% on pcp. This was supported by the net growth in meter points and the shift to a SaaS revenue model. Underlying EBITDA for the period amounted to $4.3 million and recorded a statutory loss of $12.8 million, which was impacted by the increase in costs of NZ$6.2 million over the prior year.

Revenue Analysis (Source: Company Reports)

Guidance: For FY20, the company expects to report EBITDA of around NZ$11 million. In addition, GTK is optimistic about the cash generation in 2H FY20. The company is likely to release its preliminary FY20 earnings on 26^th November 2020.

Valuation Methodology: Price to Sales Based Market Multiple Valuation (Illustrative)

Price to Sales Based Market Multiple Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: As on 31^st March 2020, the cash balance of the company stood at NZ$11.1 million and debt balance stood at $4.7 million. In addition, the company is positive about liquidity outlook on the back of long-term ASB facility. In the past three and six months, the stock of GTK has corrected 3.41% and 16.91%, respectively. As a result, the stock is inclined towards its 52-week low of $0.770, offering decent opportunities for accumulation. On a technical front, the stock of GTK has a support level of ~$1.09 and a resistance level of ~$1.513.  We have valued the stock using the price to sales multiple based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). For the purpose, we have taken peers such as Over The Wire Holdings Ltd (ASX: OTW), 99 Technology Ltd (ASX: NNT) and Reckon Ltd (ASX: RKN). Therefore, considering the decent liquidity position, growth in committed recurring revenue, current trading levels and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.125 per share, up by 1.351% on 3^rd November 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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