Goldman Sachs upgrades Objective Corp to Buy on back of two emerging growth drivers

Objective Corp’s (ASX: OCL) share price received a nudge forward this morning, up 0.42% at noon after Goldman Sachs upgraded the content, collaboration and process management software solutions company to Buy from Neutral, with the target rising to $18.90 from $16.85 a share - which implies 22% upside.

Underscoring Goldman’s bullish note this morning is the broker’s view on the company’s core offerings, Objective Build and RegWorks (regulatory compliance software), which are expected to be two key emerging growth drivers in coming years.

Building consent platform

The broker is particularly positive on Objective Build’s opportunity to become the de facto building consent platform across local government in A&NZ.

Despite investor concerns around macro softening, and deal slippage, Goldman’s sees Objective as resilient.

“We are attracted to OCL’s defensive qualities including high recurring revenue, high margins, low churn, strong net cash balance sheet and public sector end markets, with the company screening towards the top of our GS Tech Resilience Screen,” the broker noted.

A more attractive entry point

Since initiating coverage back in April, Goldman’s highlights two key developments driving the broker’s more constructive view:

• A more attractive entry point, with the shares now having de-rated -40% since late 2021

• Increased conviction around OCL’s growth outlook as new products scale

“We now see OCL’s valuation as attractive compared to SaaS peers after adjusting for its growth outlook and conservative accounting policies (all R&D expensed),” the broker noted.

Revenue growth

Goldman’s estimates call for revenue growth to accelerate from 12% in FY22 to 17% in FY23 based on inclusion of the Simflofy acquisition ($3m-plus revenue) and ramp up of Build and continued traction of RegWorks.

Strong top-line growth, in addition to continued margin expansion and cost discipline, are expected to drive 20%-plus FY22-FY25 earnings per share (EPS) compound annual growth rate (CAGR).

While Objective’s FY22 trading update was in line with Goldman’s expectations, the broker sees continued robust growth and margin expansion as incrementally positive, especially given that the company doesn’t provide financial guidance.

“Key growth products, including RegWorks, are demonstrating improving momentum (see table) and extending OCL’s reach into new areas of public sector IT as its core Enterprise Content Management (ECM) product matures,” the broker notes.

Growth remains strong across subscription products with an acceleration in ECMaaS and RegWorks: Subscription recurring revenue growth vs pcp (%)

US opportunity

Given the large market opportunity (see table), longer-term, Goldman’s expects Objective to expand further into the US.

While not currently factored into Goldman’s estimates, the broker believes expansion in the US could be a material positive catalyst and significantly impact the company’s growth profile.

“In order to scale in the US we believe OCL will use M&A to build its presence, scope the market and build relationships with key industry stakeholders,” the broker notes.

“OCL has a strong net cash balance sheet (~A$64mn at 30-Jun) and a long history of accretive, strategic M&A transactions that have allowed the business to continue growing strongly while its core ECM product matures.”

The US is a large market for OCL to target relative to the size of its current main markets AU/NZ/UK

Objective Corp share price over one year.