08-July-2020:  CCZ Equities Research: Objective Corp (OCL):  OCL Branches Out with Acquisition of Itree

• Recommendation: Buy
• Valuation: $10.16 (raised from $7.26)
• Market cap: $813m
• Share price: $8.71 (10-July-2020:  $9.16) 

Excerpts:

• OCL branches out with acquisition of Itree: OCL has acquired a Wollongong based regulatory technology (RegTech) specialist, Itree for an EV of $18.5m. OCL expect Itree will contribute $14m revenue (>$8m ARR) in FY21. This represents inorganic revenue growth of 20% and ARR growth of 15% on 1H20 ARR. Itree’s core product, RegWorks is a suite of products used by Government agencies to ensure compliance with regulatory processes and requirements. Itree’s secondary offering is Reach, a cross-agency tool facilitating the secure sharing of matching records across agencies. Key benefits of the acquisition lie in the opportunity for OCL to leverage relationships to expand Itree’s customer base and the cross-sell opportunities available from OCL’s introduction to new government agencies with large document libraries.
• COVID-19 disruption speeds up adoption: OCL’s biggest competition comes from businesses that do not implement a content management solution. COVID-19 has forced many employees to WFH which has sped up the digitisation projects for many government departments and the demand curve for OCL’s cloud-based secure solutions. CCZ forecast that COVID-19 has had a positive impact on Connect sales in FY20 and will have a positive impact on ECM sales going forward.
• Growing ARR organically and through acquisitions: OCL continues to grow revenues organically through new customers and increasing revenue from existing customers who have more use cases for OCL products. An example of this is the recently signed 3 year $24.7m Department of Defence contract that represents an estimated $7.5m revenue (ex GST) per year for OCL and will contribute ~$2.3m additional ARR compared to the previous deal. OCL will utilise their strong balance sheet as they continue to look for acquisition opportunities which presents upside risk to CCZ forecasts. OCL have flagged that following the MBS acquisition, Planning Solutions is now at a critical scale to provide innovation in the Local Government market. OCL will target Planning Solutions growth through the new direct to customer go-to-market strategy.
• Investment thesis – unchanged: This accretive acquisition and the COVID-19 effect on digitisation strengthens the OCL investment case. CCZ views OCL as a business with an impressive earnings growth outlook which has been disguised by the transition from perpetual license to subscription revenues. The additional forecast organic and inorganic revenue growth, potential for OCL to utilise the ~$20m cash balance and/or debt to make an acquisition on similar multiples to Itree and reduction in discount rate from 10% to 9% have increased CCZ’s valuation from $7.26 to $10.16.

--- click on the link above for the full report ---  [I don't hold this stock]

26-Feb-2020:  CCZ Equities Research: Objective Corp (OCL):  1H20 Results: On target to meet objectives

• Recommendation: Buy
• Valuation: $7.26 (raised from $7.16)
• Market cap: $516m
• Share price: $5.52  (28-Feb-2020: $5.45)

Excerpts:

• Results summary – Within expectations:  OCL reported 1H-20 revenue of $33.3m (14% growth vs pcp) and 1H-20 EBITDA of $6.8m (21% growth vs pcp) which is broadly in line with CCZ’s run rate forecast of $69.9m revenue and $16.1m EBITDA for FY20. Annual Recurring Revenue (ARR) grew 28% to $54.1m and represented 75% of total revenue (up from 71% in pcp). This growth is accelerating compared to annual ARR growth of 15% disclosed in FY19 year-end results. 1H-20 EBITDA margin has improved from 19.3% to 20.5% due to increasing proportion of subscription revenue. CCZ expects this trend to continue. NPAT was up 17% vs pcp to $4.3m (increased effective tax rate from 10% to 18% was a drag on NPAT growth).
• Outlook commentary – Growing ARR organically and through acquisitions:  OCL reiterated that it will continue to look for acquisition opportunities which presents upside risk to CCZ forecasts. OCL flagged that following the Master Business Systems acquisition, Planning Solutions is now at a critical scale to provide innovation in the Local Government market and is an area in which they will target growth through the new direct to customer go-to-market strategy. OCL’s ARR has grown by 16% or $7.5m in the last 6 months. If we assumed this was signed up on average mid-way through 1H-20, this represents a known $1.9m uplift to 2H-20 revenue. With 23% of 1H-20 revenue invested in R&D (all expensed), OCL is clearly investing for future growth. Consistent with prior years, no interim dividend was declared with OCL expecting to declare a dividend with FY20 results.
• Forecast changes – Relatively unchanged:  While there is no change to CCZ’s FY20 revenue forecast, there is however a small change to mix with a reduction in forecast Keystone revenue growth from 10% to 5%, and an increase in forecast Planning Solutions revenue growth from 120% to 131%. Moreover, a reduction in forecast tax rate from 22% to 18% due to the introduction of the NZ R&D tax credit scheme provides a $500k uplift in FY20 forecast NPAT to $10.6m.
• Investment thesis – Unchanged:  This strong result reinforces CCZ’s buy thesis. CCZ views OCL as a business with an impressive earnings growth outlook which has been disguised by the transition from perpetual licences to subscription revenues. The reduction in forecast tax rate has increased CCZ’s valuation from $7.16 to $7.26. 

--- click on link above for the rest of their report ---

20-Dec-2019:  CCZ Equities Research: Objective Corp (OCL): No Objections to ARR growth and expanded margins

• Recommendation: Buy
• Valuation: $7.16
• Market cap: $611m
• Share price: $6.58  (31-Jan-20: $6.50)

Excerpts:

• Initiating coverage: Objective Corporation (OCL) is a multinational software business focused on providing content management and governance solutions with over 30 years of operational experience. OCL now provides software across Australia, New Zealand, the UK and the US to over 1,000 customers and 500,000 users in regulated industries. This supported revenue of $62M in FY19 (70% ARR) and close to 300 full time staff working across Australia, New Zealand, Singapore and the UK. OCL has been driven by the steady hand of founder and majority owner (~67%) Tony Walls since 1987 and has been listed on the ASX since 2000.
• Supporting CCZ’s buy recommendation is the upside risk to our forecasts which do not include growth via acquisitions. With a clean balance sheet OCL looks primed to add further products to the portfolio.
• The recent Alpha and MBS acquisitions in New Zealand (NZ) highlight OCL’s ability to create value. The acquisitions allow OCL to become the development approval (DA) process market leader in NZ with 74% of councils as customers. The development of a digitised end to end solution for the DA process through the combination of their Trapeze software along with the software acquired as part of the Alpha and MBS acquisitions should be a source of significant revenue growth into the future.
• The opportunity for OCL to cross sell products to current customers is significant. The majority of OCL’s customers only utilise one product of the 10 on offer in OCL’s portfolio. Most customers would benefit from utilising more products within the OCL portfolio and the software purchasing decision makers generally already have a relationship with OCL. CCZ expect that most of the revenue growth in future years will come from existing customers.
• OCL’s transition from the sale of perpetual licence products to SaaS (Software as a Service) annual licence fees has been a handbrake on revenues and earnings growth for the past few years. We expect negative effect of this transition to diminish with perpetual software sales only representing ~11% of revenue in FY19 and 70% of revenue being SaaS ARR (annual recurring revenue)
• The strong management team’s focus on providing solutions for customers, educating customers, high spend on R&D (over 20% of revenue all expensed) and specialised product offering act as a moat and have enabled OCL to develop world class products and a loyal customer base.

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Disclosure:  I don't hold OCL shares currently, but they're on my watchlist.