Buy this quality ASX 100 stock that deserves a re-rating like CSL and Goodman

Bell Potter thinks this tech stock is among the highest quality options on the local market.

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The Australian share market is home to a large number of listed companies.

However, only a small portion of these can be classed as truly high quality companies.

Examples of this include ASX 100 stocks such as biotech giant CSL Ltd (ASX: CSL) and industrial property company Goodman Group Ltd (ASX: GMG).

But Bell Potter thinks that we should be adding a new ASX 100 stock to the list. That is enterprise technology company TechnologyOne Ltd (ASX: TNE).

What is the broker saying about this ASX 100 stock?

According to a note this morning, the broker believes that TechnologyOne's quality makes it deserving of a re-rate to higher multiples. It commented:

Technology One has had very consistent and an increasing rate of PBT [profit before tax] growth the last four years: 13% in FY20, 14% in FY21, 15% and FY22 and 16% in FY23. This trend looks set to continue for the short to medium term with VA consensus forecast growth of 16%, 18% and 18% in FY24, FY25 and FY26 which is slightly below our forecasts of 17%, 19% and 19%. In our view this consistent and increasing growth has been a key driver of the PE re-rating in the stock over the last few years from around 30x to now around 40x. If the trend of consistent and increasing growth continues – as both consensus and we expect – then we believe this PE re-rating can continue up to a forward PE of around 50x.

Commenting on its comparison to other quality companies that have re-rated, the broker adds:

What's interesting, however, is that while all these stocks have had re-ratings largely on the back of strong earnings growth over multiple years, the growth has not been consistent and in some cases has even been quite volatile. We believe, therefore, this is a key differentiator for Technology One in its favour and the comfort the market has in knowing the growth is going be consistent and not spike in one year or sink the next only supports in our view a continued re-rating in the multiple.

Double-digit returns

In light of the above, the broker has reaffirmed its buy rating and lifted its price target on the ASX 100 stock to $20.25.

Based on its current share price of $18.14, this implies potential upside of 11.6% for investors over the next 12 months.

The broker also expects a 1.2% dividend yield, lifting the total potential return to almost 13%.

Motley Fool contributor James Mickleboro has positions in CSL and Technology One. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Goodman Group, and Technology One. The Motley Fool Australia has recommended CSL, Goodman Group, and Technology One. 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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