Goldman Sachs: A mixed bag for ASX small-caps (and 2 BUY ratings)

The performance of companies at the smaller end of the ASX 300 has been highly idiosyncratic recently, rather than driven by broader trends such as an improved macro backdrop. That was the overarching message from Goldman Sachs’ latest research report, Micro over macro, as authored by small-cap analyst Chris Gawler, CFA.

The report covers the half-yearly results handed down by several companies in the small- and mid-cap segment of the market. Within the technology sector, Gawler said these results were mixed, summing up the broad messages as:

• Longer sales cycles and deal slippage – Data#3 (ASX: DTL), Readytech Holdings (ASX: RDY), Fineos Corporation (ASX: FCL)

• Improving expectations for customer orders as the year progresses – Objective Corporation (ASX: OCL) and Dicker Data (ASX: DDR), and

• Accelerating long-term tailwinds from AI investment – Macquarie Technology (ASX: MAQ).

In another sector, Gawler pointed to land lease firms Lifestyle Communities (ASX: LIC) and Ingenia Communities (ASX: INA) as being in an “air pocket” amid ongoing weakness in new-build residential housing. “Though rising home prices and expectations for lower interest rates should see settlement rates improve from here,” he said.

“Meanwhile, the market remains sceptical of debt-funded M&A without a clear pathway to meaningful earnings accretion and in the absence of organic growth upgrades,” Gawler said, pointing to intellectual property services group IPH Limited (ASX: IPH) and Hansen Technologies (ASX: HSN) as examples.

Here are Goldman's top picks in the small and mid cap space.

Macquarie Technology (ASX: MAQ)

• Rating: Reiterate BUY

• Price target: $93, up from $82.10 previously

The $1.9 billion market cap provider of services for cloud computing, cybersecurity and data centres delivered its half-yearly earnings result on 29 February. While its EBITDA and free cash flow came in slightly ahead of Goldman Sachs’ forecast, Gawler said updates across the business were broadly in line with expectations.

MAQ 12-month share price. (Source: Market Index)

Result highlights:

On Macquarie’s CS&G business, which includes cybersecurity services: “We remain confident in the growth outlook…given its positioning to benefit from government focus on cybersecurity and enterprise cloud migrations (in particular Microsoft Azure)”

Gawler said Macquarie’s data centre operations remain in a “holding pattern” until its IC3 Super West (IC3W) data centre is completed. On track for completion in the third quarter of 2026, “IC3W at 45MW would increase MAQ’s total capacity by 3x and drive a significant earnings ramp (and in our view valuation re-rate) over the next three to five years, which in combination with another land asset, should continue the stock’s re-rate towards its closest domestic peer NextDC (ASX: NXT).

Readytech Holdings (ASX: RDY)

• Rating: Reiterate BUY

• Price target: $4.25, reduced from $4.50 previously

Readytech 12-month share price (Source: Market Index)

Result highlights:

“While it was disappointing to see RDY slightly lower its FY24 revenue guidance from mid-teens revenue growth to low-double-digit, we note that the 1H revenue softness was driven by lower-margin implementation revenue…while subscriptions grew healthily (+17%),” Gawler said.

He also has improving confidence that management can maintain its mid-teens subscription growth on the back of “further signs of execution on the Enterprise growth strategy (average revenue per new customer +29%, high-conviction pipeline A$30 million vs A$28 million FY23)”.

Dicker Data (ASX: DDR)

• Rating: Retain SELL

• Price target: $10.50, up from $10.20 previously

DDR 12-month share price (Source: Market Index)

Result highlights:

Describing the FY23 result as “solid” with margins slightly ahead of expectations, Gawler said DDR’s software business remains a bright spot. He believes the 10% growth here provides DDR with a “defensive, recurring revenue stream to balance the cyclicality in its hardware business.”

Fineos Corporation (ASX: FCL)

• Rating: Retain NEUTRAL

• Price target: $1.95, down from $2.20 previously

The provider of software services for life, accident and health insurance delivered an FY23 result that missed expectations, let down primarily by annual recurring revenues.

FCL 12-month share price (Source: Market Index)

“The softer outcome does raise some concerns around the subscription revenue outlook in the absence of further new business wins, or existing customers moving more business onto the FINEOS platform,” Gawler said.

He also referred to disappointment at the ongoing customer churn in the Limelight Health business that Fineos acquired in 2020.

“FCL is working through several material implementations, which could serve as proof points for future wins, and is currently navigating through a transition away from Services revenue – both of which are creating near-term top-line headwinds,” Gawler said.

“Meanwhile, cost out is progressing in line with expectations, though we would highlight this appears increasingly necessary, given FCL’s softening growth outlook and relatively modest cash balance.”