I have written a number of articles about quality compounder stocks, analysing stocks that are consistent with the Quality Compounder screen as presented by Stockopedia contributor Roland Head in his article Building a screen to find Compounding Quality stocks. Another ASX listed stock that makes the grade for this screen is TechnologyOne (ASX:TNE).
TechnologyOne has been focussed on building a business that compounds since their inception 35 years ago. They have a stated ambition to double in size each five years. Whilst they do make some strategic acquisitions, most of their growth is organic.
They are an Enterprise Resource Planning (ERP) software company. They have transitioned the business such that they are primarily a Software as a Service (SaaS) business. A high portion of their revenue is recurring. Their annual recurring revenue (ARR) has reached $350 million, with a growth rate of 22% in the most recent period. They are aiming for ARR of $500 million by FY26. The business has very low churn rates which facilitates the ability to compound revenue growth.
Most of their revenue comes from the APAC region, but they recently acquired UK based Scientia Resource for $22 million as they look to expand their geographic coverage. Their customer base is well diversified across different sectors as shown in the chart below. Their clients are government bodies, educational institutions, hospitals, financial services institutions and large corporates. In other words, large organisations with complex operations and sizable IT budgets.
Source: TechnologyOne, 2023 Half Year Results, 23/5/23
Returning to the initial proposition, of Technology One being a quality compounder, the data for the Quality compounder screen is presented in the table below. As can be seen, they exceed all thresholds by large margins.
Criteria | Threshold | TNE |
QualityRank | 80 | 99 |
Long-term ROCE | 18% | 43.9% |
TTM ROCE | 15% | 43.1% |
Operating margin 5 yr avg | 10% | 25.2% |
Operating margin TTM | 10% | 30.7% |
Net margin 5 yr avg | 8% | 19.5% |
Net margin TTM | 8% | 24.4% |
OCF / EPS | 0.8 | 1.7 |
Avg FCF (long term) / Assets | 8% | 14.5% |
Sales CAGR 5 yr | 0% | 6.3% |
Sales TTM / Sales Prior TTM | 5% | 17.2% |
Debt to assets | <50% | 7.0% |
Interest cover | 10x | 1543x |
The first component of being a quality compounding stock is to have a high Quality score. With a score of 99,…
