The Australian Securities Exchange is not known for tech companies. But closer examination shows a jump in listing volumes and some strong performers.
Almost one in 10 newly ASX-listed entities are now from the information technology sector. Similar to the resource sector, ASX is rapidly developing a “long tail” of tech stocks thanks to a boom in so-called “backdoor listings” and to a lesser extent Initial Public Offerings (IPOs).
Backdoor listings were popular last year as tech companies snapped up listed ASX “shells” before ASX delisted entities from January 2016 that have had their securities suspended for more than three years. These backdoor listings typically involve a dormant shell company acquiring the shares or assets or a private tech company.
The upshot is dozens of new tech stocks, most of them yet to make a profit, joining ASX. And plenty of potential goldmines – and landmines – for investors and speculators.
The Switzer Super Report analysed the one-year total return (including dividends) of more than 130 software and services stocks for this analysis. Hardware and equipment, and semi-conductor stocks, will be covered in a future column. Most activity is in software.
There were some terrific gains. Language technology provider, Appen (APX), delivered a 342% return over 12 months. The impressive aviation simulation and control systems developer, Adacel Technologies (ADA), is up 226% after several tough years.
Aconex (ACX), a leading cloud-technology provider for the global construction industry, posted a 126% total return over 12 months. Computer software designer, Altium (ALU), is up 57% and Gentrack (GTK), a utilities software provider, has returned 57%.
Other good performers include education software provider The Citadel Group and the sector star Technology One (TNE).
Care is needed relying on one-year returns. Some tech stocks are coming off several years of share-price losses, and returns from tech backdoor listings can be complicated by share consolidations that amplify price gains.
Also, my analysis shows almost half ASX software stocks have delivered a negative total return over 12 months. Fewer than 40 stocks delivered gains of more than 20%, which is not as attractive as it seems because of the risk inherent in many tech stocks.
The good news is that a number of tech stocks have fallen sharply as sector hype fades. Recent gains in resource stocks could be weighing on parts of the tech sector as hot money moves from speculative software companies to mining and energy explorers.
Former market darlings, such as recruitment site 1-Page (APG), have tumbled. Luxury goods marketplace AHALife (AHL), Asia-focused social media provider Migme (MIG), and building software provider Urbanise.com (UBN) have also dropped after posting strong gains. Many tech backdoor listings are struggling after an early burst of enthusiasm and hype.
Value is rapidly returning to parts of the tech sector. But risks are high.
Choosing top tech stocks
First, beware tech backdoor listings. They are mostly for speculators. Backdoor listings tend to be smaller than IPOs by capital raised and, although they have similar compliance obligations, come with greater risk than tech floats.
The biggest threat is that shareholders in the dormant listed company that acquired the private tech company sell stock to make a quick profit. That appears to be the case in several recent backdoor listings that delivered strong early gains before being smashed.
Similar care is needed with tech IPOs. Too many are overhyped and overvalued. Most are better buying a year or two after listing when escrow restrictions expire (and early investors are free to sell stock) and as the IPO has more history as a listed company.
Focus on established, profitable tech companies with sufficient share liquidity. There’s enough risk in tech investing as it is without chasing companies that are years away from profit and living from one capital raising to the next. That is speculation, not investing.
Exceptions include tech companies that have rapidly expanding market share, are generating huge amounts of cash, and reinvesting heavily in the business to seize the opportunity. Micro-jobs platform, Freelancer (FLN), and accounting software provider, Xero (XRO), are examples.
Following these rules excludes about two thirds of the information technology sector by my count and narrows the search to a smaller, high-quality group of stocks.
Tech opportunities
Below are five tech stocks in the software and services sector that should be on portfolio watchlists.
Computershare (CPU), not included in this list, also looks better value after share-price falls this year. RXP Services (RXP)and the cloud-computing play Bulletproof Group (BPF) stand out among smaller tech stocks and SMS Management & Technology (SMX) looks undervalued after heavy falls in the past 12 months.
1. Link Administration Holdings (LNK)
The share registry was among the highest-quality tech IPOs in the past 12 months. Link raised $943 million and listed in October 2015, its shares issued at $6.37 and rallying to $8.64.
Link slumped to $7.70 as global markets were rattled in late June by Britain’s decision to leave the European Union. It recovered most of these losses within weeks – a good sign that suggests plenty of fund manager support for the stock.
Link looks on track to modestly exceed full-year prospectus forecasts and has plenty of scope to grow by acquisition. Gains will be slower from here but there is a lot to like about Link’s long-term exposure to the superannuation sector and its market position.
Link is trading ahead of the consensus analyst valuation of $7.92. It’s not cheap, but can do better than the market expects and is best bought during bouts of market weakness.
Chart 1: Link
Source: Yahoo
2. iSentia Group (ISD)
The media-monitoring company listed on ASX in June 2014 through a float, after raising $284 million at $2.04 a share. iSentia peaked at $4.95, then fell to $3.34. The market was a little spooked after slower-than-expected revenue growth in Australia and New Zealand and slightly higher-than-expected costs in its half-year result in February. iSentia was overdue for a share-price pullback after running too far, too fast.
I rate its long-term potential. iSentia is the clear market leader in its industry in the Trans-Tasman, its business model is scalable, it has strong growth prospects in Asia, the move to digital marketing is driving demand for media monitoring, and iSentia has a good record.
Chart 2: iSentia
Source: Yahoo
3. BPS Technology (BPS)
The well-run BPS operates the Bartercard trade exchange and provides on-demand, cloud-based trading and payments platforms that help drive customers to merchants. The stock rallied from a 52-week low of 68 cents to as high as $1.32, before easing to $1.01. The $59 million company is attracting more attention from professional investors.
BPS is targeting a large addressable market of small and medium-enterprises in Australia and looks well positioned in the emerging financial technology (fintech) space. Its membership is growing rapidly and it has good international growth prospects.
A trailing Price Earnings (PE) of about 6 times is undemanding given BPS’s established customer base and profitability – something many tech stocks with significantly higher valuations are yet to achieve. As a micro-cap stock, BPS suits experienced investors.
Chart 3: BPS Technology
Source: Yahoo
4. NEXTDC (NXT)
I have identified the data-storage group and its property trust spin-out, Asia Pacific Data Centre Group, a few times for this report over the past 12 months. NEXTDC has a one-year total return of 38%; Asia Pacific Data Centre is up 32%.
The long-term thematic of more organisations storing data off-site at specialist centres is compelling. The so-called “Internet of Things” will drive even faster growth in connected devices and a boom in “big data” that leads to rising demand for data storage.
NEXTDC should deliver another strong result when it reports its full-year profit in August and is rapidly becoming more profitable with the rise in contracted utilisation rates at its centres.
NEXTDC is not cheap after strong gains this year. Like Link, it is best bought during bouts of share-price weakness that create a better entry point. The full-year result might be an excuse for investors to take profits given the extent of recent gains, and a buying opportunity.
Chart 4: NEXTDC
Source: Yahoo
5. Vista Group International (VGL)
Vista looks the pick of small-cap entertainment technology stocks. It provides cinema-management software, film-distribution software and customer-analytics software in companies in the global film industry. Vista’s attractions include a business model based on recurring software revenue, and growing exposure to Chinese cinema.
The New Zealand-based company, dual-listed on ASX, raised $83 million in an IPO and listed in August 2014 at $2.15 a share. It has rallied to $5.62.
Vista is building a strong position in the booming Chinese cinema market. It announced in March the sale of its Chinese subsidiary into a new venture owned by Vista and Weying Technology. Weying’s online ticking app is integrated into WeChat, the giant Chinese app used by more than 600 million people.
I like the long-term thematic of rising demand for entertainment in emerging markets as the global middle-class grows. China is expected to become the world’s biggest box office as more consumers flock to comic-book action franchises and western-style movies.
Vista announced in May its first deal to provide cinema software in Africa. It has potential to grow offshore – and a valuation to match at current prices. But Vista’s leverage to global growing entertainment demand justifies the valuation for long-term investors.
Chart 5: Vista Group
Source: Yahoo
- Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without taking into account your objectives, financial situation or particular needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at July 20, 2016.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.