Technology One (ASX: TNE)

By Jason Fittler

Technology One is one of Australia’s leading software companies. 

It provides a range of services including consulting, development and implementation of software systems, and customer support for more than 800 clients, with a focus on medium-sized enterprises, government and education institutions.

The customer base is relatively sticky with 60% of revenue generated from existing customers, who tend to eschew changing software systems midstream.

Given this high degree of repeat sales in addition to healthy margins, the company has posted strong returns on invested capital, with a historical return on equity in excess of 30 percent.

With no net debt on the balance sheet, we expect the dividend to be fully franked from 2015 onwards in addition to other capital management initiatives.

Looking forward, growth will be underpinned by migrating its products and clients across to its cloud platform, which will serve to minimise costs as well as provide the opportunity to deliver additional services to clients.

Bears cite potential risks such as low barriers to entry, intense competition, the skills shortage in the IT sector and the need to reinvest a portion of the revenue in research and development to keep abreast of technological changes.

While these risks should not be downplayed, we take comfort given the strong track record of management, with a total shareholder return of 22% during the past ten years.

We feel the company is fairly valued at current levels and are looking for a better entry point into this stock.

Fair value $2.40.

Accumulate at $2.16 or less.

Given positive price action we will be placing orders around $2.15.

Other tidbits:

90% revenue from Australia

Total shareholder return of 22% during the past 10 years.

20% of total revenue spent R&D.

Since listing in 1999, revenue has increased every year. EPS followed suit in all but two years – 2003 and 2009.