Objective Corporation (ASX:OCL) is a superb ASX 200 tech stock

Objective Corporation (ASX:OCL) is one of a kind. There are few companies with a 2-decade listed life without raising a cent of capital and even fewer that have been 65%-founder owned all the while. Objective Corporation is one such company.

For some time it seemed like it had its run and couldn’t get any bigger, particularly amidst the Tech Wreck of 2022-3. But the back half of 2024 was a good time for the company, even if it begs the question as to if there’s any growth left. 

 

Who is Objective Corporation?

Objective Corporation has software products that can handle common problems or manually intensive tasks local governments and businesses in highly regulated sectors undertake on a daily basis as well as to store data. This software increases the ease, security and efficiency with which such tasks can be accomplished.  

For example, one of Objective’s recently won clients was the New Zealand Police Force which chose Objective to manage the registration and licensing of all firearms in New Zealand, an outcome of the Christchurch mosque attack in 2019. Another highlight was the Gambling Commission in Great Britain. 

 

 

Self-funded since IPO

When it was founded, Objective Corporation was an on-premise license business, but has transitioned into a subscription model.  It makes over the majority of its revenue from Australia, but also has a significant and growing presence in New Zealand and the UK. It is targeting expansion into the US over time.  

The company IPO’d in mid-2000 at just 50c per share, raising $6m. It has not raised a cent of capital ever since and has been 65% owned by founder and CEO Tony Wall.

 

The Cloud transition is only just getting started 

Since the pandemic, it is easy to think that the transition to the Cloud is virtually complete and that the ‘Big Tech’ stocks cannot get any bigger (at least in the current environment).

But we note two observations by Goldman Sachs that put to bed these theories.  First, that the transition of organisations from on-premises software to cloud SaaS is only 20% completed. And second, SaaS could be a US$800bn Total Addressable Market globally within an overall cloud software TAM of US$1tn. Today, global revenues are US$235bn (about 25% of global GDP) but enterprise IT revenues are much larger (at US$1.4tn). Goldman thinks that the Cloud could easily grab the latter and even more from non-digital spending.  

Now this is all well and good, but worthless to a company if it cannot take a market share of this. But we think Objective Corporation stands out because of its market position, underpinned by its long-term track record. It has undertaken M&A but has primarily grown organically and innovated internally. And government spending only goes in one direction, in Australia up 4% on a CAGR basis since 1960 without ever declining in nominal terms.  

People don’t just expect things (i.e. government services and compliance monitoring) to be done digitally, but to be done efficiently and securely. By extension, so do Objective’s customers.

 

Overcoming market challenges 

For FY24, the company made $118m in revenue (up 6%) and $105m in Annualised Recurring Revenue (ARR) (up 11%). Its EBITDA was up 66% to $44m and it made a $31m profit (up 49%). The company closed the period with $96m in cash and paid 17cps in dividends. Crucially, the company continued to edge towards its goal of having 100% subscription software.

The company’s growth has meant it can grow its bottom line whilst still investing in R&D, with $276m invested in FY24 – 30% of software revenue.

 

Solid outlook

For FY25, estimates call for $126.6m in revenue (up 7%), $48.7m EBITDA (up 10%) and $0.35 EPS which translates to a $33.3m profit (up 7%) with 95m shares on issue. For FY26, $140.3m revenue, $56.3m EBITDA and a $39m profit (up 11%, 16% and 17% respectively).

The company’s P/E is 39.1x, its EV/EBITDA 25.4x and its PEG is 1.8x. This is expensive for an ASX 200 stock, but it is below companies such as WiseTech (ASX:WTC) which are a lot more hyped up.  

 

A look at the risks

What are the risks with this one? Most obviously the risk of rising interest rates and inflation, particularly relevant for a tech stock seeking expansion in the US.  Ironically, software has proven its ability to grow throughout economic cycles, yet investors will mark down the company because higher interest rates decrease the value of future cash flows.  

Another one is the risk of cyber-attacks. Even though one of its selling points is military-approved levels of security, the Optus cyber breach depicts that there is always a risk in this regard. Other risks include talent shortages, wage inflation, competition from larger peers and the risk of higher churn.

You also have to bear in mind that the company invested over 30% of its revenue on R&D and the raw figure is going in quite quickly. Although this are hardly impacting profits right now, because these expenditures are 100% expensed when incurred, investors should still watch this figure closely. Still, this is below many of its peers (Xero’s R&D for instance is 43% of sales).

 

Not for the yield junkies

Objective Corporation isn’t a company for dividend investors, given its yield is low and unlikely to grow given future acquisitions and high R&D expenditure. ESG investors may also not like the risk of cyberattacks, even if some of its projects are ESG friendly – earlier this year it was hired by the Victorian government to help it enforce anti-wage theft regulation.

Finally, we observe that it has less upside than peer ReadyTech (ASX:RDY), which we have analysed here. But investors looking for a profitable tech stock with high-recurring revenues, growth potential, a sticky client base, and relatively lower R&D expenditure, have their company right here. 

 

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