There could be some really good software as a service (SaaS) ASX shares to think about in June 2021.
Companies that operate in a SaaS model have the potential for generating recurring revenue from its clients, at relatively high profit margins. Here are two ideas:
Class Ltd (ASX: CL1)
Class is rated as a buy by the broker Ord Minnett with a price target of $2.40. That suggests a potential upside of more than 40% over the next 12 months for the cloud SMSF accounting provider.
The broker was attracted to the promising outlook for Class’ newer offerings. The business is expected to achieve stronger profit margins in the medium-term, which is attractive when combined with the very low customer churn.
Its 3-year goal has been to grow new revenue and total addressable market, its scale and improve its operating capability at speed.
In FY22 and beyond it’s looking to grow its addressable market into adjacencies where complex administration rules exist and can be automated by technology. It’s also looking for data aggregation and analytics opportunities, as well as offshore opportunities.
The SaaS ASX share is looking to “drive efficiency and price opportunities for margin improvement in FY22 and beyond”.
Management believe that ongoing market share growth will come from the multiproduct strategy execution.
Class is expecting to grow its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) margin over time.
TechnologyOne Ltd (ASX: TNE)
TechnologyOne is a large ASX tech share that helps global clients by providing enterprise resource planning (ERP) software.
It’s currently rated as a buy by Morgans, which has a price target of $10 on the business, which suggests a potential upside of over 10% over the next 12 months.
The broker is attracted to the recurring revenue of the business and the growth of that SaaS income.
TechnologyOne recently revealed its FY21 half-year result, which showed a 48% increase in net profit after tax to $28.2 million. This was driven by a 7% increase in revenue from its SaaS and continuing business to $140.6 million, combined with a 5% drop in expenses. The SaaS annual recurring revenue (ARR) jumped 41% to $155.8 million.
TechnologyOne is expecting low double digit profit growth in FY21.
Over the longer-term, the SaaS ASX share is expecting continuing strong growth, driven by its global SaaS ERP solution as it wins more business from existing customers, added new customers and expanded globally.
Looking at the next few years, it’s expecting its SaaS and continuing business to grow by approximately 15% per annum once it has wound down its legacy licence fee business. Management also see the total ARR increasing to more than $500 million by FY26.
The economies of scale from its global SaaS ERP solution could see its profit before tax margin expanding to 35%.