The Motley Fool

Is Technology One Limited the most undervalued tech share on the ASX right now?

Technology One Limited (ASX: TNE) is one of the leading global Enterprise Resource Planning (ERP) software providers to medium and large enterprises in Australia and around the world.

ERP software is basically used to integrate and simplify core business processes. For example, processes such as inventory ordering and tracking, payroll, HR, accounting, etc, are all managed on the one software solution provided by Technology One.

Technology One is the dominant player in this space in Australia and focuses primarily on the government and education sectors, where it boasts big name customers such as Melbourne University, Seven West Media Ltd (ASX: SWM), NIB Holdings Limited (ASX: NHF), and The Australian Department of Foreign Affairs and Trade, just to name a few.

It is also expanding into the UK where it manages approximately 45 customers, predominantly in the government and Higher Education sectors.

The company is regarded as the best Aussie tech stock by many financial commentators as management has consistently managed to grow earnings per share by a compound annual rate of 16.4% p.a. since 2008 (according to CommSec).

However, the share price has underperformed over a one-year time frame with the shares trading sideways in that time. The company has still been growing well in this time, but just not as fast as the market expected. I believe this has created a good opportunity to pick up shares in a high-quality company on the cheap.

Valuation

At the recent FY18 interim result Technology One management guided for 10%-15% profit growth for the full year. Taking the mid point of this guidance and multiplying by last year’s earnings per share (EPS), will give them 15.9 cents of EPS.

Based on the current market price of Technology One shares, this puts the company on an FY18 PE of 27. I believe this is an attractive price to pay for a high quality company operating in the high growth sector of data and cloud computing.

This is much cheaper than fellow Aussie tech stocks, REA Group Limited (ASX: REA) and Altium Limited (ASX: ALU), that trade on PEs of 43 and 54 respectively.

Another thing to keep in mind is that at the recent FY18 interim report, management beat the profit forecast they had given to the market by 7%. So there is the possibility that the latest full year guidance of 10%-15% profit growth could also prove conservative and be beaten again, which would most likely see the share price re-rate.

Foolish takeaway 

Technology One has posted a lousy couple of years in terms of share price performance, however, this is a normal feature of quality companies listed on the stock market. Short-term underperformance can allow for attractive entry-points to the savvy investor.

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Motley Fool contributor Jacob Ballard owns shares of REA Group Limited and TechnologyOne Limited. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended NIB Holdings Limited and REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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