Objective Corporation Limited

OCL Details
Flat FY19 Top-Line as Compared to FY18:Objective Corporation Limited (ASX: OCL) is involved in the supply of information technology software and services.

FY19 Key Highlights for the period ended June 30, 2019:Group revenue for FY2019 was reported at $62.0 Mn, as compared to $63.1 Mn in FY18. EBITDA for the period was reported at $14.1 Mn. Net profit after tax (NPAT) for the period increased by 23% to $9.1 Mn as compared to $7.4 Mn in FY18. Operating costs for the period decreased by 6% to $49.3 Mn as compared to $52.2 Mn, mainly due to the resetting of costs in its consulting business, offset by additional investment in R&D across all products and new go-to-market resources to further develop product and geographic markets.

The company has invested in implementing more efficient, robust and streamlined systems and processes to facilitate further scaling of the business without proportionally increasing overheads. The total acquisition consideration for Alpha Group comprised of NZ$3.0 Mn in cash plus 200,000 shares in Objective Corporation. Annualised FY19 revenue for Alpha Group totalled NZ$3.0 Mn with Annual Recurring Revenue (ARR) of NZ$2.0 Mn as on June 30, 2019.

Following the successful transitioning to subscription software contracts, recurring revenue (including Alpha Group) increased to 70% of total revenue. At the end of FY19, ARR increased to $46.6 Mn, an increase of 15% on the previous year. Revenue from core subscription software solutions including ECM as a Service (ECMaaS), Connect, Keystone and Trapeze increased by 23%, 27%, 21% and 20%, respectively. In FY19, the company invested about 21% of revenue in research and development (R&D), which stood at $13.2 Mn as compared to $13.1 Mn in FY18.

Objective IQ is an evolution of the Objective Design Language (ODL) designed to delight end users, accelerate the adoption of new Objective products and deliver familiarity to move seamlessly between each of them. It enhances the ability of the customers to work remotely on mobile and access Objective functionality natively within the Microsoft Office 365 suite of products.


FY19 Key Metrics (Source: Company Reports)

What to Expect:As per the release, the company expects material growth in revenue and profitability in FY20, underpinned by its capability and maturity to invest in businesses, grown organically or inorganically.It is determined in utilizing its decent cash flows to invest in its existing portfolio and products introduced via acquisitions. With an expanding range of solutions from Objective IQ and user experience, it aims to focus in enhancing its ARR (annualised recurring revenue).

Stock Recommendation:OCL’s share generated a positive YTD return of 108.42%. Its gross margin stood at 96.1% better than the industry median of 83.7%. Its EBITDA margin and net margin for FY19 stood at 23.6% and 14.6%, better than the FY18 result of 27.3% and 15.1%, respectively, implying improvement in the company’s fundamentals. However, its current ratio for FY19 stood at 1.33x, lower than the industry median of 1.75x. Moreover, its debt to equity ratio for FY19 is higher than the industry median. On valuation front, its EV/Sales multiple on TTM basis stands at 7.8x, higher than the industry median of 4.9x, indicating an overvalued position at the current juncture. The stock is trading close to its 52-week high of $6.050, therefore, probability for correction increases. Hence, considering the aforesaid facts and current trading levels and stretched valuations, we recommend a "Sell' rating on the stock at the current market price of $5.92, up 7.441% on November 27, 2019, taking cues from the AGM 2019.

 
OCL Daily Technical Chart (Source: Thomson Reuters)

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