Readytech ready to cash in as work and learning move online

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Readytech (ASX:RDY) is a technology company that has developed software as a service (SaaS) solutions focused on education and employment.

Its education products include student management and learning management systems. For the workforce, in addition to payroll, they cover workforce management which includes things like recruitment, rostering, and compliance as well as the increasingly relevant remote staff management.

In March the company completed the acquisition of Open Office for $54 million upfront plus an additional $26 million if certain targets are met. This opens up new areas for them in local and state government and justice case management solutions.

readytech shares

The company has 137 government customers in Australia and 16 courts and justice customers globally generating revenue of about $17 million.

To fund this acquisition Readytech raised $25 million through a share placement, followed by an additional $2.7 million raised from retail investors via a share purchase plan.

Readytech has increased revenue at about 13.5%p.a. over the past four years and this was repeated again in the first half of the 2021 financial year. Management reiterated guidance that they expected revenue growth to be in the mid-teens and that was excluding the impact of the Open Office acquisition. Including Open Office, revenue is expected to be about $49 million. Based on this forecast, Readytech is trading on a multiple of about five times sales.

Readytech is a relatively mature business in that it has an established presence in its market niches. It has high levels of recurring revenue, about 90%, and 95% customer revenue retention rates. This is also true for Open Office where the average length of customer relationships is about seven years.

It has also been growing the average revenue per customer as many of their recently acquired customers are on bigger contracts, consistent with their strategy of targeting higher-value customers. A win rate of 65% over the past 12 months and a solid pipeline have the company in a good position.

The macro-environment is also positive as organisations look to replace legacy systems with cloud-based systems that work across multiple functions and support remote activity. There has been an additional tailwind from the Government's $2 billion JobTrainer program. Only 3% of students on Readytech's student management systems are international students, so the impact from COVID has been negligible.

In March the stock was added to the S&P/ASX All Technology Index. That seemed to spark a surge in interest and the stock has rallied 50% since March. It is up over 75% in the last 12 months.

Many technology stocks burn through cash as they plough all their earnings back into growth, sometimes needing to raise additional capital to fund their marketing as well as product development.

Readytech on the other hand is profitable. Earnings before interest, tax, depreciation and amortisation margin is in the high 30s and even after allowing for investment in product development the company is still generating solid positive cash flow and net profit after tax. While it raised capital for the Open Office purchase, more than half of it was funded from the existing balance sheet.

Market analysts are forecasting that earnings per share will grow by 90% in financial year 2021 and a further 35% in 2022. Despite the strong run up in the share price recently, it is still trading on a 2022 forward PE ratio of less than 20. Whilst this is not cheap for a micro-cap stock, given the growth profile, it is also not unreasonable.

If Readytech can maintain the momentum in sales growth, focusing on recurring revenue and high customer retention and also capitalise on their expanded addressable market, it may prove to be a ready opportunity for investors.

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Chris is a senior investment analyst with Spotee Consulting. He is an experienced leader and investment expert having worked in financial markets for over 25 years. This includes co-founding a stock market research business and running it for seven years until it was sold. He is qualified as a Chartered Financial Analyst and holds a Graduate Diploma of Applied Finance and Investment and Bachelor of Commerce Degree. He has been a regular contributor to Money since 2012.