Objective: Initiating With a Fair Value Estimate of AUD 5.50 and a Narrow Moat Rating

We initiate coverage on Objective OCL with a fair value estimate of AUD 5.50 per share and a narrow economic moat rating. We view Objective as a company that has successfully carved out its niche but is operating in a relatively mature market. We forecast revenue to grow organically at a 10-year CAGR of 6% over the next decade and EBIT margins to expand to 21% from 19%, primarily due to an increased capitalization rate of research and development. We use a weighted average cost of capital of 7.5%. We assign Objective a Morningstar Uncertainty Rating of High and rate its Capital Allocation as Exemplary. At current prices, Objective’s shares screen as materially overvalued.

We view Objective as a well-managed, founder-led software company that has successfully carved out a niche in software for enterprise content management in Australia and New Zealand. We consider the business high-quality due to its government customer base, recurring revenue streams, and high switching costs.

However, we believe Objective’s core ECM product suite operates in a relatively mature market. We estimate organic revenue grew at a CAGR of just 4% over the past five years in the segment, despite this period having outsize demand because of the COVID-19 pandemic. Similarly, gross margins across the group declined to 93% from 96% over the period, despite a transition away from services over the period, which also points to a maturing market, in our view.

We, therefore, expect most of Objective’s future growth to come from newer, industry-specific applications of ECM software, such as for assessing building development applications and compiling new regulations, as these markets are still at a lower stage of maturity. We also believe Objective will increasingly have the capacity to deploy capital into these areas, due to the mature nature of its core ECM product suite.