Goldman Sachs bullish on Objective Corp’s move to SaaS subscription model; reiterates Buy

Wed 07 Dec 22, 11:47am (AEST)
An office worker uses a laptop to perform duties sitting at a display table built around an ornamental plant array
Source: iStock

Key Points

  • Objective Corp provides software to governments in Oz, UK, NZ, and the US; its key product is a workflow management system typical to government
  • From FY24, Objective will no longer sell one-off licences and will switch to charging public sector entities recurring subscriptions
  • Goldman believes “shares can outperform [other SaaS peers] in a more challenging macro environment”

Despite near-term headwinds pushing down revenue growth guidance for FY23 into single digits and a rocky November, Goldman Sachs has released a note reiterating its Buy stance on government software provider Objective Corp (ASX:OCL).

Goldman Sachs maintains a $16 target price for Objective shares, currently at $13.78 — indicating upside potential of 14%. 

The reiteration comes by way of a new development at Objective: the company is going to start charging government departments subscription fees to use its software and computing infrastructure, instead of one-off perpetual licences. 

Customers will be transferred onto subscription models in FY24; explaining to where the bank sees headwinds extending. 

SaaS model to offset wage growth; event spend

That transition to Software-as-a-Service (SaaS) is predicted to offset growing wages in the sector, higher opex spend on travel and events to the tune of $2m, and a forecast decline in services revenue. 

Transition to SaaS itself is also considered by Goldman Sachs to be a headwind for FY23 as contracts will need to be re-drawn leaving open the possibility client retention may suffer.

Worth noting is that 5 out of 9 brokers covered in Market Index’s consensus scan for Objective recommend traders sell the stock. Regardless, the bank still says “Buy.” 

Valuation appeal and likely outperformance 

“When adjusting for OCL’s conservative accounting (100% of R&D expensed), robust growth outlook, defensive end markets and high franchise quality, we see valuation appeal compared to SaaS peers,” Goldman Sachs said. 

“[We] believe the shares can outperform in a more challenging macro environment.” 

Objective is one of the larger tech players on the ASX with a market cap of $1.3bn. 

It primarily supports government agencies but also provides software for the construction industry, and, broad organisational regulation and compliance.

This isn’t the first time Goldman Sachs has thrown its support behind the company, issuing a Buy alert back in early August.

Part of that earlier Buy rating was driven by a fall in the company's share price, leaving open a more attractive entry point.

In late November, a trading update released by Objective outlining its plans to swap to SaaS correlated with a huge sell-off of 1.3m shares.

Year to date performance for Objective is down -35%.

A look at Objective Corp's six month charts show the steep sell-off in late November
A look at Objective Corp's six month charts show the steep sell-off in late November


Written By

Jonathon Davidson

Finance Writer

Jonathon is a journalism graduate and avid market watcher with exposure to governance, NGO and mining environments. He was most recently hired as an oil and gas specialist for a trade publication.

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