Update 22/08/2024

FY24 NPAT of $31m

Given the change in accounting policy, NPAT will always look higher than previous and hence it should trade on a lower multiple than before. The current share price of just above $13 on an EPS of $0.329 indicates a PE of around 40x. I feel that this is not an outrageous valuation considering a comparable company in Technology One trades on over 50x PE.

I'm going to assume 15% CAGR NPAT growth for the next 5 years and applying a terminal PE of 35x. Discounted back 10% pa gives me a valuation of $13.55.

Disc: Held IRL and on Strawman.

Update 04/09/2023

OCL had flagged earlier this year that growth would be subdued. NPAT came in at $21.1m which was only just above FY22 NPAT of $21m.

I believe that growth will return in FY24 and beyond and if they can compound at 15% for the next 5 years then at a terminal PE of 45x, I calculate a valuation of $11.85 to achieve a 10% pa return.

One thing to keep in mind is that OCL is changing accounting policy. Only 50% of R&D will now be expensed compared to 100% in the past.

I think I will likely value OCL on a free cash flow basis in order for consistency. Free cash flow for FY23 was pretty similar to NPAT at around $20m. Going to leave this figure here as a comparison for next period as NPAT is going to jump up based on the new accounting policy. Under the new policy NPAT would have come in around $32m.

Disc: Not held.

Update 25/11/22

OCL released a trading update for FY23 flagging decreased revenue growth and profit margin reduction. This is as a result of a transition from perpetual licencing to subscription based revenue for their products. There will also be salary growth and more spending to win new customers.

Revenue growth is expected to be single digit rather than double digit as seen in the past for the next FY but expected to reaccelerate again in FY24 as subscription revenue is recognised.

I have updated my valuation to $11.38 assuming decreased profit growth to single digit and reaccelerating from FY24 onwards.

I had recently sold out of OCL in my real life portfolio (was planning on selling on SM too but accidentally placed a buy order instead) but will look to buy back in with the expected weakness following this update.

Disc: Not held IRL, held on SM

Update 14/07/2022

OCL released a trading update for their FY22 results

NPAT for FY22 of $21m (which doesn't include a $1.4m settlement with NZCC). So actual NPAT of around $19.6m.

This is still around a 20% increase to NPAT YOY.

Will maintain my current valuation as I think it is still a bit too expensive at the current share price.

Disc: Not held IRL or on Strawman

Update 13/01/2022

OCL released a trading update detailing their unaudited 1HY2022 results.

NPAT: $9.8m which is up 35% compared to 1HY2021

I'll assume FY2022 NPAT of around $20m which would represent around 20% increase compared to FY2021 of $16.1m.

So if they can maintain 20% EPS growth for 5 years and trade on a PE of around 45x. To get a 10% return I have a target buy price of around $12.31.

Disc: Not held IRL or on Strawman

Original Report

Objective Corp is a software company which provides software for many government agencies.

When valuing stocks it is hard to predict what type of growth will occur in the future and so I prefer to think more in the line of: What price would I pay today that would allow a reasonable rate of return over the next 3-5 years.

At the current price, OCL is trading at a PE of around 114x and so if you buy at today's price you'd have to expect 25% EPS growth for the next 5 years and for OCL to be trading at a PE of 60x in FY26 in order to achieve around 10% return per year.

Personally I find this to be a bit rich for me so applying a 15% EPS growth for 5 years and a PE of 45x in FY26 gives me a valuation of $9.95.

However with these high quality, highly scalable companies which can maintain high levels of growth long term it would not be unreasonable for someone with a high risk tolerance to justify the current price but I would prefer to be a bit more conservative given current market conditions.