Technology One’s TNE first-half profit before tax increased 33% to AUD 82 million on 21% growth in annual recurring revenue compared with the previous corresponding period. The company will pay an interim dividend of AUD 6.60 cents per share, up 30% on the PCP.

Why it matters: The company is tracking broadly in line with our fiscal 2025 forecasts, with slight top-line beats offset by slightly higher-than-expected costs.

  • The company upgraded its guidance for full-year profit before tax growth by 1% to 13%-17%, implying profit growth will slow in the second half. Based on current momentum, we expect profit will come in at the high end of the range.

The bottom line: We raise our fair value estimate for wide-moat Technology One by 11% to AUD 18 per share on higher revenue growth assumptions. At current prices, shares screen as materially overvalued. Our fair value estimate implies a forward price/earnings ratio of 47.

  • We believe the company will struggle to maintain high revenue growth as strong tailwinds from increased government spending and high inflation ease. Improving fiscal discipline in the future could also become a headwind following years of profligacy.
  • New segments are unlikely to support continued high growth rates, as they lack similar product/market fit and are too small to drive group results. Most of the company’s growth remains driven by legacy segments.

Despite exceptionally high quality, there is insufficient growth to justify the share price

We expect Technology One’s strategic focus to revolve around increasing the number of products used by its local government and education customers in Australia and New Zealand. To a lesser extent, we expect Technology One to focus on vertical expansion and geographic expansion into the UK education market.

Technology One has been highly successful in capturing the Australian and New Zealand market for enterprise resource planning software, and we expect this to continue. Technology One’s products are used by councils representing nearly 75% of Australia’s and New Zealand’s populations and over 60% of their universities. We expect these customer verticals to remain the focus as Technology One continues growing its market share in these verticals and develops a broader suite of ERP products for them.

In other verticals, such as federal government and health, Technology One has been comparatively less successful in penetrating the market, and we don’t expect this to meaningfully improve. Technology One’s products are used by around 25% of federal government organizations in Australia and New Zealand and less than 5% of health and community services organizations. We attribute the difference to a lower level of product-market fit. Federal government customers, we believe, have a scale which makes them highly attractive targets for nonspecialized enterprise resource planning providers, which compete heavily. Health customers have more specialized requirements that specialized health ERP providers can better serve, in our view.

Technology One bulls say

  • Technology One’s product suite, like many ERP software suites, is highly entrenched and sticky.
  • Technology One’s customers are some of the most sound a company could wish for, boosting customer retention rates due to the absence of business failure risk.
  • Technology One has substantial opportunity to upsell customers its continuously expanding product suite.

Technology One bears say

  • Technology One already has large market share in some of its verticals, especially the local government segment in Australia and New Zealand, limiting further market share growth.
  • Technology One already offers a fairly comprehensive ERP product suite, leaving little room for growth in the number of products. Expansion beyond ERP into customer experience remains unproven.
  • Geographic expansion into the UK provides opportunity but also presents a more competitive market.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.