Emerging Companies: TechnologyOne Ltd (ASX: TNE)
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Overview: TechnologyOne Ltd ("TNE", "the Company") is an integrated developer and distributor of enterprise software for the Government, financial services, education, health, and the utilities sectors. It was established in 1987 and has been continually profitable since 1992. We have maintained coverage for its strong balance sheet and history of profit growth. Our last advice was a ‘hold’ recommendation at $1.40/sh in January. With the share price rising in subsequent trade, we consider whether the outlook has improved?
Catalysts: Since its 1999 listing, revenue and earnings have increased every year bar two at double-digit rates. Management has forecast another strong result for FY13 and we expect a reversal of a decade-long trend of margin contraction to fuel further growth. Its strong cash flow, balance sheet, and expanding cash reserves create scope for special dividends.
Hurdles: Recent profit growth has coincided with a contraction in pre-tax margins from 25% to 18%. To reverse the trend management is targeting lower growth in R&D spend, which could impact innovation. As a degree of growth is reflected in the Company’s present valuation, a modest deterioration in its financial performance could adversely impact the stock price. Major shareholdings of founding Director impact trading liquidity in the stock.
Investment View: Whilst TNE’s present valuation incorporates a degree of further growth, the Company commands a strong financial position, and management has a track record of delivering value. Recent capital spending on new local and offshore R&D facilities should facilitate cost control and ongoing innovation. As benefits of the margin focus become salient, we are upgrading our view to ‘buy’.
General Information Only
This material has been prepared by Jason Price. Jason Price is an authorised representative (AR 000296877) of 62 Consulting Pty Limited (ABN 88 664 809 303) (AFSL 548573) (62C), and a Director of S3 Consortium Pty Ltd (trading as StocksDigital).
This material is general advice only and is not an offer for the purchase or sale of any financial product or service. The material is not intended to provide you with personal financial or tax advice and does not take into account your personal objectives, financial situation or needs. Although we believe that the material is correct, no warranty of accuracy, reliability or completeness is given, except for liability under statute which cannot be excluded. Please note that past performance may not be indicative of future performance and that no guarantee of performance, the return of capital or a particular rate of return is given by 62C, Jason Price, StocksDigital, any of their related body corporates or any other person. To the maximum extent possible, 62C, Jason Price, StocksDigital, their related body corporates or any other person do not accept any liability for any statement in this material.
Conflicts of Interest Notice
S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.
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The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.
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