Up 45% in a year! But this boom ASX 200 tech share is still a buy: expert

A woman wearing yellow smiles and drinks coffee while on laptop.A woman wearing yellow smiles and drinks coffee while on laptop.

It’s pretty incredible, but there is actually a technology stock in the S&P/ASX 200 Index (ASX: XJO) that’s risen 46% over the past year.

This is a pretty remarkable effort during a time when the S&P/ASX All Technology Index (ASX: XTX) lost 7.8%. If you go back to November 2021, the tech index has lost a third of its value.

That outlier is Brisbane’s TechnologyOne Ltd (ASX: TNE).

“TechnologyOne is Australia’s largest enterprise resource planning (ERP) software-as-a-service (SaaS) provider,” Fairmont Equities managing director Michael Gable said in a blog post.

The reason for its outperformance compared to its industry peers is the demographics of its clients.

“Around 85% of revenue is generated from the government, education and health sectors, which are highly defensive. The company has a customer retention rate of +99% and [a] very low customer churn rate.”

‘Consistent performance’ and ‘highly attractive’ fundamentals

According to Gable, TechOne’s “fundamentals are highly attractive”, citing the business’ 90%+ recurring revenue profile, a less than 1% churn rate, “a highly cash generative business model” and a clean balance sheet.

The software provider has a history of “consistent performance”, and currently has “achievable medium-term targets”.

That includes a profit before tax margin of 35% by the 2026 financial year and a three-year earnings growth profile of +14% per annum.

Although the TechOne share price has gone sideways for the past month, Gable expects it to resume its climb.

“With the shares currently trading on a one-year forward P/E multiple of ~44x, which is above the upper end of the trading range over the last four years (35 to 43x), we consider that the market is starting to factor in TechOne’s medium-term targets.”

About 18 months ago, the company acquired UK software vendor Scientia in an effort to gain clientele in the education sector.

Gable is looking forward to seeing what impact that has on TechOne’s performance.

“Evidence of a step-change in ARR performance in the UK following the Scientia acquisition, as well as maintaining a higher rate of additional customers per year onto the SaaS platform are two key factors that would support a more positive view on the shares.”

Gable’s peers are somewhat divided on TechOne shares.

According to CMC Markets, seven out of 12 analysts currently reckon the stock is a hold. Two rate it a buy and three urge a sell.

The post Up 45% in a year! But this boom ASX 200 tech share is still a buy: expert appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Technology One. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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