Investors in the tech sector are sitting on some of the best gains that the ASX has to offer after a number of tech stocks delivered blistering returns over the past year or so.
If you are hunting for the next potential tech outperformer, Macquarie Group Ltd (ASX: MQG) has a tip for you as the broker has just initiated coverage on Readytech Holdings Ltd (ASX: RDY) with an “outperform” recommendation.
The next hot tech stock?
Readytech offers people management systems to 3,600 customers in the education and training sector, which is relatively resilient to economic cycles. All the better given the uncertain outlook for our economy.
The company’s clients include tertiary institutions, VET providers, government agencies and HR departments at companies.
“At a group level, ReadyTech has a high recurring subscription revenue model (95% revenue retention), supported by a long-dated and diversified customer base (avg. >7yrs, largest customer is 2% of FY18 revenue),” said Macquarie in a note released yesterday.
“Operating leverage is evident with FY16-FY19e revenue/EBITDA CAGR of 11%/28%, EBITDA margin +13.3% to ~39% (37% AASB16 unadjusted), and 41.6% in CY19e, above broader SaaS peer group.”
Growth upside and re-rating opportunity
The broker also believes there are good organic growth opportunities for the company. This includes winning bigger contracts across educational clients (like it did with University of Queensland), upselling to its existing client base and positive industry tailwinds.
Macquarie thinks the stock could re-rate further and that investors shouldn’t be put off by its valuation. The stock is trading on a FY20 price-earnings multiple of over 20 times, based on the broker’s forecast.
“Top of the range is justified by a high degree of earnings visibility, long dated & diversified customer base, growing ARPC, above peer EBITDA margins and strong cash conversion,” said the broker.
“We see potential for a further re-rate beyond this range if ReadyTech can deliver a track record of organic growth highlighted by customer wins, execution of dual brand strategy, sustainable margins and cash conversion.”
Macquarie has a $2.20 price target on Readytech.
The stock isn’t without risks though. It needs to prove it can bed down recent acquisitions (it made five in 2017 and 2018), while any changes in government legislation and increasing competition could give shareholders a nasty shock.
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