ASX software developer Objective Corporation Limited (ASX: OCL) is among the many companies to have enjoyed a welcome rebound in their share prices over the last few weeks. Since bottoming out at around $4.40 in late March, the Objective share price has surged back almost 30% higher to $5.70 as at the time of writing.
What is driving the rebound?
After the massive share sell-off that occurred at the height of the coronavirus panic, many investors have been flocking to ASX shares that may have been oversold in the correction.
Take cloud-based accounting software developer Xero as an example. Xero’s services will still be in high demand throughout the coronavirus lockdown, especially now that the JobKeeper legislation has passed through Parliament. Small businesses will still need to manage their tax and payroll obligations over the next few months, meaning Xero may be capable of maintaining a significant portion of its revenues. And investors quickly realised that the crash in its share price actually meant Xero was great value.
It is the same thinking that is causing a bounce in the Objective share price. The panic-selling that occurred over the last couple of months may have pushed the Objective share price into undervalued territory. After all, like Xero, its IT services will continue to be highly sought after throughout the coronavirus crisis.
What does Objective Corporation do?
For those unfamiliar with Objective Corporation, the company develops software to support the government and financial services sectors. Objective has developed a suite of software that enables secure file sharing, helps government agencies respond to information requests, streamlines and improves processes, and strengthens corporate governance practices, amongst a range of other services.
While a potential recession will obviously put some downward pressure on Objective’s revenues, the company services sectors which will continue to be relied upon heavily by society throughout the pandemic. Its software is also perfectly designed to facilitate remote working situations.
Another great thing about Objective is that it recently completed a change in its business model, transitioning to subscription-based contracts. According to its report for the half-year ended 31 December 2019, a record 75% of its total revenues for the half were generated via annually recurrent contracts. This is a great way to guarantee cash flows during the current crisis.
In the same first-half FY20 report, Objective announced a 14% uplift in revenue against the prior comparative period to $33.3 million, and an increase in net profit after tax (NPAT) of 17% to $4.3 million. The fact that Objective was already profitable prior to the coronavirus pandemic strengthens its chances of surviving the downturn that will inevitably be caused by the crisis.
Should you invest?
Amidst all the panic and uncertainty caused by the coronavirus pandemic, it’s important to look to sectors of the economy that will be relied upon throughout this crisis. This process might even turn up some interesting companies that you may otherwise have never considered investing in.
For example, meal kit delivery service Marley Spoon AG (ASX: MMM) and skin and surface sanitiser spray company Zoono Group Ltd (ASX: ZNO) have both seen their share prices take off due to the shifting demands of a COVID-19 economy.
Objective Corporation also has much about it to recommend. The company services sectors of the economy that will continue to drive demand throughout the pandemic, and it has also switched to a more sustainable subscription-based business model.
It’s not a mature, blue-chip ASX share so it is still a risky investment, but it will definitely be an interesting one to at least have on your watchlist over the next few months.
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Rhys Brock owns shares of Bravura Solutions Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Emerchants Limited and Objective Limited. The Motley Fool Australia owns shares of and has recommended Bravura Solutions Ltd. The Motley Fool Australia owns shares of Xero. The Motley Fool Australia has recommended Emerchants 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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