##{"id":90217,"date":"2020-11-25T12:18:51","date_gmt":"2020-11-25T01:18:51","guid":{"rendered":"https:\/\/www.fnarena.com\/?p=90217"},"modified":"2020-11-25T12:18:52","modified_gmt":"2020-11-25T01:18:52","slug":"technologyone-reaffirms-strength","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2020\/11\/25\/technologyone-reaffirms-strength\/","title":{"rendered":"TechnologyOne Reaffirms Strength"},"content":{"rendered":"

TechnologyOne provided a solid performance over FY20, despite the pandemic and extra provisioning, although several brokers remain wary of valuation<\/p>\n

-Has the inflection point in cloud conversion arrived?
-Reaffirmed strength in government, education software
-UK reaches break even<\/strong>
<\/p>\n

By Eva Brocklehurst<\/p>\n

Cash flow, strong cost controls and profit margins stood out in FY20 as TechnologyOne ((TNE)) performed impressively despite the impact of the pandemic and the need to take extra provisioning.<\/p>\n

The business has evolved as software-as-a-service (SaaS) and Morgans assesses the transformation period is almost over. Legacy revenue declined -34% and double-digit revenue growth should start to be more apparent in the next several years.<\/p>\n

Morgans was impressed with the results given the damage from the pandemic, calculating that after including rental expenses, free cash flow was $54.2m or 82% of normalised net profit. Revenue growth of 4% may appear weak but the broker suspects this is a function of the transition to SaaS. In contrast, at $58.7m free cash flow was up 52% for the year.<\/p>\n

<\/p>\n

In FY20 around 70% of total revenue was recurring and, classing consulting in this way, Morgans calculates 90% of revenue is now recurring. Shaw and Partners agrees the inflection point has finally arrived, and without the pandemic the results may have been even better.<\/p>\n

Reported pre-tax profit rose 8% to $82.5m in FY20, at the lower end of the guidance range, as TechnologyOne found it necessary to make a rare downgrade in October after a court ruled adversely in a case brought by a former employee.<\/p>\n

Yet, profit margins were a highlight, rising to 27.6%<\/strong>. A final dividend of 9.41c was declared. No specific guidance was provided but the company did indicate it expects further strong profit growth in FY21.<\/p>\n

Macquarie also hails strong cost control, noting second half operating expenditure was down -19% half-on-half. Employee costs were down -11% while capitalised R&D increased to $37.1m. The education vertical held up better than feared and Macquarie flags commentary regarding a robust tender outlook.<\/p>\n

Wilsons considers the results have reaffirmed the nature of the company's "mission-critical" software for education, government and local councils. The company has a track record of meeting or beating guidance and the migration to the cloud remains intact, only slowing modestly.<\/p>\n

Given the resilience of the government sector over the last 18 months, Wilsons is confident TechnologyOne will continue to capture its share of opportunities. Around 86% of FY21 revenue is already contracted.<\/p>\n

UBS also highlights momentum in federal government business, an area which can be improved given TechnologyOne has a lower penetration compared with the local government and education sectors.<\/p>\n

Targets Delayed<\/u><\/p>\n

TechnologyOne did draw out its recurring revenue target of $500m, to FY26 from FY24. This was the main detractor in the results for several brokers, given most businesses have rapidly adopted the cloud and SaaS.<\/p>\n

Morgans suspects the company is taking a conservative stance while Shaw considers the revenue profile is now more achievable. TechnologyOne has replaced references to doubling gross profit every 4-5 year with doubling every five years, which implies average growth of 15% as opposed to 15-19%.<\/p>\n

UK<\/u><\/p>\n

The UK reached break even and there were nine new customers gained, although Morgans points out revenue needs to accelerate to cover the $11m in expenses in the UK on a sustainable basis.<\/p>\n

Still, management is confident that after more than a decade of generating losses, UK profitability is finally sustainable. One caveat, the broker suspects, is any need for further reinvestment.<\/p>\n

All up, TechnologyOne is robust, although Morgans is conscious that technology companies in general are trading on elevated multiples<\/strong>. This could occur for some time, given the prevailing low interest-rate environment.<\/p>\n

The broker observes that, with coronavirus vaccines expected to boost global economic growth, this is resulting in a rotation to cyclical stocks from technology-centric growth stocks. Should this become a longer trend it could result in downside risk to the share price and multiples.<\/p>\n

Moreover, Morgans warns that investors need to be aware that changes to interest rates and\/or investor sentiment swing the pendulum materially for valuing growth stocks, and this is the main risk for TechnologyOne.<\/p>\n

Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, believes much of the fundamental upside is priced in and retains a Market Weight rating with a $9.37 target while Bell Potter, with a $10 target, downgrades to Hold from Buy on valuation. Shaw and Partners, also not one of the seven, retains its Buy rating and $9.76 target.<\/p>\n

The database has one Buy rating (Morgans), one Hold (Macquarie) and one Sell (UBS). The consensus target is $9.20, suggesting 1.7% upside to the last share price.<\/p>\n

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n

FNArena is proud about its track record and past achievements: Ten Years On<\/a><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"