A delay in finalising some consulting contracts has led Technology One to downgrade FY17 profit forecasts but brokers observe the business continues to perform well.<\/p>\n
-Several negative effects converge to cause downgrade, likely one-offs By Eva Brocklehurst<\/p>\n Technology One ((TNE)) may have issued its second downgrade to 2017 expectations but brokers are not overly concerned. Pre-tax profit growth of 7-9% is now forecast, versus prior guidance of 10-15%.<\/p>\n The main reason for the revision to the prior guidance is that there's been a delay in the number of deals being finalised where the company is a preferred contractor. These contracts have not been lost but the revenue just pushed out into 2018.<\/p>\n The company now expects consulting profit of $5.4m in 2017. Underlying growth of around 20%, in Macquarie's calculation, highlights the fact the business is still performing well. A significant turnaround is expected in 2018 and the company's software offering continues to appeal to more customers, as corporations realise the benefits in moving away from customised software and on-premises systems where possible.<\/p>\n Macquarie expects significant improvements in performance and efficiency, as the company has separated its consulting business into two business units<\/strong>, one for new customers and the other for existing customers. Sales are heavily weighted to the second half, with 82% of net profit expected to be generated in second half of 2017.<\/p>\n Bell Potter downgrades forecasts for earnings per share in 2017 and 2018 by -6% and -4% respectively. The broker now forecasts pre-tax profit growth in 2017 of 8.5%.<\/p>\n Forecasts for strong pre-tax profit growth of over 20% are maintained for both 2018 and 2019. The main drivers are improved profitability in both the cloud and UK businesses and growth in licence fees.<\/p>\n Bell Potter, not one of the eight stockbrokers monitored daily on the FNArena database, rejigs its modelling and the net result is a -4% decrease in the target to $5.50 from $5.75, a 21% premium to the prevailing share price. As a result, this warrants an increase in the recommendation and the broker upgrades to Buy from Hold.<\/p>\n Had three significant events not all occurred in 2017, then Morgans agrees profit growth would have been closer to 20%. The negatives were the Brisbane City Council dispute costs, higher-than-expected Evolve costs and delays in the consulting business contracts.<\/p>\n The broker notes, typically, the company's portfolio offers a more balanced outcome as one part underperforms and another outperforms, netting each other out<\/strong>. Morgans reduces forecasts for earnings per share by -6-10% and now reduces 2018 forecasts to be closer to 10% growth in earnings per share.<\/p>\n The broker takes a view that this is a one-off downgrade although acknowledges others may be concerned "as downgrades typically happen in threes". The broker reduces its target to $4.16 from $5.69 and retains a Hold rating. Morgans judges the business to be high-quality, given the relatively defensive earnings, long-term track record and impressive financials.<\/p>\n Still, the trading multiple over the last five years has re-rated to more than 30x price\/earnings from an historical average of 15x price\/earnings, and Morgans is acutely aware that a change in interest rates and\/or investor sentiment could instigate a de-rating, noting that the company has not meaningfully downgraded earnings expectations since the GFC in 2007 and this has, possibly, led investors to forget that nothing is guaranteed.<\/p>\n FNArena's database shows one Buy rating (Macquarie) and two Hold. The consensus target is $5.20, suggesting 14.2% upside to the last share price. This compares with $5.92 ahead of the announcement. Targets range from $4.16 (Morgans) to $5.75 (UBS, yet to update on the announcement).
\n-Stock has re-rated substantially and could be vulnerable to a change in sentiment<\/strong>
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