We recently researched Technology One (ASX:TNE) in The Dynamic Investor. With the shares having gained ground since our report, is a recovery back to recent highs on the cards?
About Technology One
Technology One is Australia’s largest enterprise resource planning (ERP) Software as a Service (SaaS) provider. The Company is the only SaaS provider with a fully integrated ERP suite and its entire enterprise suite is delivered on mobile devices. There are currently 19 products onto the new cloud native Ci Anywhere (CiA) SaaS platform.
Customers use TNE’s SaaS solution, as the benefits include cost savings, scalability, security, and anywhere-anytime access. It also allows agility and speed to market of new products. These customers have hundreds of thousands of users, making TNE’s the largest ERP SaaS offering in Australia.
Key Fundamental Drivers
Strong Profit Growth Expected Over Medium Term
TNE is on target to achieve Profit Before Tax (PBT) growth in the high-teen % in each year of FY25, FY26 and FY27, which is driven by low-teen % revenue growth and margin expansion. In context, PBT growth for the 12 months to 30 September 2024 (FY24) was +18%. This is above both the Company’s guidance range of 12-16% and historical guidance range of 10-15%. Pleasingly, the +18% PBT growth was achieved despite a margin headwind the SaaS+ rollout (which delays revenue recognition vs traditional model for professional services).
TNE has previously outlined intentions to drive PBT margin expansion from ~30% in FY24 towards 32% in FY25 and 35% over time. Whilst TNE did not provide specific margin guidance for FY25 at the full-year result, the Company remains on track to deliver incremental margin expansion over the coming years.
New Annual Recurring Revenue Target
TNE reported Total Annual Recurring Revenue (ARR) of +20% to $470.2m. Total ARR growth was driven by exceptionally strong UK ARR growth, where sales ARR was up 70%. All UK implementations in FY24 were delivered via the SaaS+ model and TNE is starting to see Requests for Proposals specifically requesting for SaaS+.
The Company has bought forward its $500m ARR target to 1H25 (previously FY25) and outlined a new long-term +$1b ARR target by FY30. The latter target appears conservative in comparison to the historic and current sales run-rate trajectory.
Several factors underpin ARR growth over the medium term. These include normalisation of churn rates, increased product penetration, new product development and further acquisitions.
Balance Sheet Position Remains Strong
The Company is well funded with a net cash position of $278m as at 30 September 2024 and no debt. Maintaining strong cash conversion levels is likely to increase the cash balance as at FY25 above $300m.
The strong balance sheet position provides TNE with the opportunity to consider Merger & Acquisition opportunities and/or capital management. Regarding the latter, TNE announced at the FY24 results release in November that their dividend policy has been revised from a growth target of 8-10% to a payout ratio of 55%-65%. This aligns the dividend with NPAT growth. The revised dividend policy does not preclude TNE from continuing to pay special dividends.
Fundamental View
While the current multiple of ~63x seems stretched, TNE’s compelling fundamentals are hard to ignore. To this end, we highlight: i) TNE’s above-trend ARR and earnings growth outlook, ii) Improved earnings visibility and iii) Upside leverage to Company targets (in particular from the SaaS+ offering).
Further, TNE is not impacted by tariffs and its revenues are defensive and highly recurring.
We also note that there is still runway for the share price to recover back towards its recent highs of ~$32 per share in late February 2025 – equating to a 1-year forward P/E of ~69x, with only minor revisions to EPS estimates since that time. A key upcoming catalyst for the shares is the 1H25 results release, due on 20 May.
Charting View
We looked at Technology One shares on a few occasions in the past year as it was trending very well. However, in late February it broke under the 50 day moving average (dotted line) and then in March it broke under the January low. With the uptrend now over, commented in our recent research report that we needed to see the stock get back above these key levels for the chart to look more positive again. That is, a push above $29.50 would be a buy signal. The last couple of days has seen that occur, which means we now have a buying opportunity with TNE.
Michael Gable is managing director of Fairmont Equities.
CLICK HERE to read our Testimonials.
Current share prices available here.
You can learn more about technical analysis in this article.
An 8-week FREE TRIAL to The Dynamic Investor can be found HERE.
Would you like us to call you when we have a recommendation? Check out our services.
Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.
Like this article? Share it now on Facebook and X!