Highlights:
- Shaw and Partners upgraded TechnologyOne shares to buy after their 2022 crash
- The shares are looking relatively attractive at their current price given the comany's strong FY21 results and outlook
- There is around a 10% upside to the broker's price target of $11.90 a share
The TechnologyOne Ltd (ASX: TNE) share price jumped to a two-week high today after Shaw and Partners upgraded the company's shares to "buy".
The cloud-based software company rallied 2.74% to close at $10.86 while the S&P/ASX 200 Index (ASX: XJO) gained 1.17% on Wednesday.
Technology One outperformed other ASX tech shares today. The WiseTech Global Ltd (ASX: WTC) share price increased 0.56%, the Altium Limited (ASX: ALU) share price added 0.19%, and Nextdc Ltd (ASX: NXT) shares closed 1.43% higher
TechnologyOne share price hit by rate concerns
The TechnologyOne share price has suffered a sharp decline, along with other IT shares, so far in 2022. This is due to rising interest rate expectations.
It's expected higher rates will have a bigger impact on tech shares as they trade at a premium to the broader market.
This is also why the high-flying tech sector has raced ahead of most other sectors when interest rates were falling towards zero.
Falling back to value territory
The about-turn in the outlook for interest rates caused Technology One to shed more than 15% since the start of the calendar year. This is despite management posting a good FY21 result in late November.
At the time, Shaw and Partners was impressed with the company's financial performance but, back then, its shares were looking pricey at around $12.55.
That effectively puts the TechnologyOne share price on a lofty FY22 enterprise value-to-adjusted earnings before interest, tax, depreciation and amortisation (EV/Adj EBITDA) multiple of 42.1 times.
What is driving the broker upgrade to "buy"
The silver lining to the correction in the TechnologyOne share price is that its shares are now looking relatively cheap.
"TNE is now trading on an FY22 Adj EBITDA multiple of 35x, which now puts it at the bottom end of its historical range (33-42x)," said the broker.
What's more, Shaw and Partners believes that management's goal of generating $500 million in annual recurring revenue by FY26 is achievable.
What is the TechnologyOne share price worth?
"This top-line profile, after allowing for conservative cost growth (~8% CAGR), should deliver material Adj 'cash' EBITDA growth (~20% CAGR through FY26) and margin expansion (~10ppt through FY26)," added the broker.
"Further, this attractive profile is supported by a strong balance sheet (net cash of $143m) and offers upside potential based on UK market penetration outperforming and/or entry into other geographies, including the US, over time."
The relatively attractive valuation and strong growth outlook convinced Shaw and Partners to upgrade its recommendation on Technology One to "buy". The broker's 12-month price target on the shares is $11.90 a share.
