Company Reports

We maintain our AUD 5.50 per share fair value estimate for narrow-moat Objective following first-half results. Gross margins stopped declining in the period, which was an improvement from a five-year trend of declining margins. We view gross margins as a good leading indicator for strength, or weakness, in software companies—the reason for this is that software companies usually offer a combination of software and professional services. Software margins change little over time, but professional services fees tend to get discounted or removed altogether when sales deals need to be closed, which happens more in a weakening macroenvironment or when a company’s competitive position weakens.

We expect Objective’s strategy to focus on investing heavily to continue expanding its product portfolio, both organically and inorganically. Over the past decade, Objective invested heavily to adapt its core enterprise content management software suite to evolving customer needs, especially around the transition to the cloud and remote working. We view these trends as maturing and we don’t see other trends requiring a similar magnitude of investment on the horizon. As such, we believe Objective will increasingly have capacity to deploy capital into more industry-specific applications of ECM, such as for assessing building development applications and compiling new regulations. We view the expansion into planning and building most favorably, with Objective’s products already commanding dominant market shares in Australia and New Zealand, both of which have outsize construction sectors.

We initiate coverage on Objective with a fair value estimate of AUD 5.50 per share and a narrow economic moat rating. We view Objective as a company that has successfully carved out its niche but is operating in a relatively mature market. We forecast revenue to grow organically at a 10-year CAGR of 6% over the next decade and EBIT margins to expand to 21% from 19%, primarily due to an increased capitalization rate of research and development. We use a weighted average cost of capital of 7.5%. We assign Objective a Morningstar Uncertainty Rating of High and rate its Capital Allocation as Exemplary. At current prices, Objective’s shares screen as materially overvalued.

We expect Objective’s strategy to focus on investing heavily to continue expanding its product portfolio, both organically and inorganically. Over the past decade, Objective invested heavily to adapt its core enterprise content management software suite to evolving customer needs, especially around the transition to the cloud and remote working. We view these trends as maturing and we don’t see other trends requiring a similar magnitude of investment on the horizon. As such, we believe Objective will increasingly have capacity to deploy capital into more industry-specific applications of ECM, such as for assessing building development applications and compiling new regulations. We view the expansion into planning and building most favorably, with Objective’s products already commanding dominant market shares in Australia and New Zealand, both of which have outsize construction sectors.