Technology One: Fair Value Estimate Raised by 25% on Transfer of Coverage to a New Analyst

We raise our fair value estimate for Technology One TNE by 25% to AUD 14 per share following a transfer of coverage to a new analyst. Our upgrade is primarily driven by a better appreciation of the switching costs of Technology One’s product suite as well as the quality of its public sector customer base. Based on this, we have also upgraded our economic moat rating for Technology One to wide, from narrow previously. We forecast revenue to grow at a 10-year CAGR of 10% during our explicit forecast period and EBIT margins to expand to 37% in fiscal 2032 from 31% in fiscal 2022. We use a weighted average cost of capital of 7.5%, reflecting Technology One’s exceptionally low revenue cyclicality. We upgrade our Capital Allocation Rating to Exemplary and maintain our Medium Uncertainty Rating. At current prices, Technology One’s shares screen as slightly overvalued.

We believe Technology One has successfully carved out a niche in enterprise resource planning software for local government and education in Australia and New Zealand. Technology One’s products are used by councils representing nearly 75% of Australia and New Zealand’s populations, and over 60% of their universities.

We view Technology One’s market position as highly defensible. Across our coverage universe, we find ERP software to be especially sticky due to its mission-critical nature and the limited benefit from switching providers. We also see ERP systems typically being run as a suite of integrated applications, allowing information to travel easily through an organization, and providing additional switching costs. Given that the average Technology One customer used more than six products in 2022, we believe integration between these products provides an additional layer of switching costs.