Cloud And AI Adoption Will Drive Long-Term Margin Expansion And Earnings Resilience

Catalysts

About Atturra

Atturra is an advisory and IT solutions provider focused on industry-specific, cloud, integration and AI-enabled offerings across Australia, New Zealand and select overseas markets.

What are the underlying business or industry changes driving this perspective?

• Scaling of proprietary platforms such as Scholarian and Boomi ACP, which already generate over $1.1 million of high-margin recurring revenue and are expected to grow at more than 100% annually, is described as steadily lifting group revenue mix toward higher gross margins and expanding EBITDA margins over time.
• Rapid adoption of cloud, data integration and AI in enterprise and government IT stacks directly aligns with Atturra's Boomi, Microsoft and managed cloud specialisations, and is presented as supporting double digit growth in the $30 million plus managed cloud business and driving faster top line growth than the current 5% to 10% organic guidance.
• Increasing regulatory and customer focus on data sovereignty and security in Australia and New Zealand plays to Atturra's sovereign private and hybrid cloud capabilities, which command above group gross margins, and is seen as improving overall profitability and operating leverage as this business scales.
• Political and corporate support for reshoring and strengthening local manufacturing, together with Atturra's expanded manufacturing client base of more than 100 customers and ERP accelerators, is described as providing a long runway for cross sell and upsell, underpinning recurring and long-term client revenue growth and supporting earnings resilience.
• Atturra's strong balance sheet with $91.6 million in cash and a deliberate pivot toward capital discipline, integration synergies and EPS growth after a heavy acquisition phase is presented as creating capacity for accretive investments, reduced dilution impact and improving earnings per share as operating leverage from scale is realised.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Atturra's revenue will grow by 15.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.0% today to 5.2% in 3 years time.
• Analysts expect earnings to reach A$24.0 million (and earnings per share of A$0.07) by about December 2028, up from A$9.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$34.0 million in earnings, and the most bearish expecting A$19.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.8x on those 2028 earnings, down from 34.6x today. This future PE is lower than the current PE for the AU IT industry at 40.4x.
• Analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.8%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Extended weakness in Australian federal and defense spending, which already reduced Canberra-related revenue by $13.9 million in FY 25 and is guided as a further possible $10 million softening in FY 26 and $9 million in FY 27, could structurally cap or reverse growth in a key sector and put pressure on group revenue and operating leverage.
• The strategy relies heavily on acquisitions and subsequent systems integration, with $47.2 million invested in subsidiaries in FY 25 and further integration costs ahead. Any cultural misalignment, client loss or failure to extract synergies would dilute returns on capital and compress net margins and earnings despite top line growth.
• High expectations for proprietary IP such as Scholarian, Boomi ACP and other Atturra offerings, which are forecast to grow recurring revenue at more than 100% from a base of just over $1.1 million, may not materialize at scale in a competitive, rapidly evolving AI and SaaS market. This could limit the planned mix shift toward higher gross margin revenue and constrain EBITDA margin expansion.
• Heavy reinvestment into strategic sales capability, AI initiatives and IP development, including more than $2.5 million of large deal and strategic sales investment and up to $2.5 million of capitalized development in FY 26, may not translate into sufficient new contracts or pricing power. This could leave the company with elevated cost bases and lower than expected net margins and earnings growth.
• Rapid technological change and intensifying competition in cloud, data integration and AI, including from larger global providers in hybrid and private cloud, could erode Atturra's current positioning and awards advantage. This may result in slower managed cloud growth than the anticipated double digit trajectory and limit future revenue and EBITDA expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$1.06 for Atturra based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.2, and the most bearish reporting a price target of just A$0.95.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$462.4 million, earnings will come to A$24.0 million, and it would be trading on a PE ratio of 20.8x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of A$0.85, the analyst price target of A$1.06 is 20.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.