The Technology One Limited (ASX: TNE) share price increased by around 21% for CY2018. This strong performance has quickly been overshadowed by the increase in its share price since the start of 2019. Currently, the Technology One share price is up by nearly 40%, trading at $8.53.
Is the share price too expensive now?
Although Technology One trades on high PE ratios, when compared to its industry, there is still value to be found in the current share price.
From the recent full-year results, Technology One reported an increase in its profit after tax by 15% which met its full-year guidance of 10% – 15%. With the cost control implementations, Technology One is increasing its efficiency and this is improving its margins over time. Since 2011, the margin has gradually increased from 1% and currently sits at 5%.
The profit figures reported allowed for an increase in the total dividend by 8%. Given the growth of Technology One, a dividend payout ratio of 68% should be appropriate provided its earnings per share continues to increase.
Technology One reported its annual licence fee revenue growth of 16% with a customer retention rate of over 99%. This retention rate can be attributed to its Ci anywhere and TechnologyOne software which have been standout performers.
There is plenty of growth available for Technology One
With the rapid expansion of the Asia-Pacific region, Technology One still has many potential customers in the future. Currently, the penetration of Technology One doesn’t exceed 15% in any of the vertical markets which are part of the Asia-Pacific region.
The current focus for Technology One will be on expanding its customer base and continuing to control its costs. With the current tailwinds, Technology One is well positioned to meet its guidance of doubling in size every five years.
Technology One is a company which has outstanding customer retention rates with high profile customers such as governments, higher education institutions, and corporates. Technology One has achieved 19 years of consecutive revenue growth. Soon this may be 20.
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Motley Fool contributor Elton Wang has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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.