Stiff Regulatory Hurdles And Fierce Global Competition Will Weaken Profitability

Key Takeaways

• Increased regulation, economic fragility, and reliance on government contracts threaten revenue stability, earnings growth, and margins.
  
• Heightened competition and geopolitical barriers may erode pricing power and limit international expansion and diversification.
  
• Strong SaaS transition, R&D-driven innovation, international growth, regulated market focus, and cloud migration are boosting recurring revenue, margin stability, and future scalability.

Catalysts

Supplies information technology software and services in Australia and internationally.

• Heightened regulatory scrutiny and the prospect of stricter data privacy laws in key markets could lead to higher compliance costs and protracted product rollouts, which would weigh on net margins and delay both revenue recognition and recurring revenue growth.
  
• Increasing global economic fragility and risks of recession threaten IT budgets in both public and private sectors, raising the likelihood of delayed or cancelled software contracts and directly restraining revenue and earnings growth.
  
• Continued reliance on government-related contracts makes Objective vulnerable to cyclical shifts in public sector budgets and prioritizations; potential government spending cuts or digitization pauses may drive volatility in earnings and undermine long-term revenue stability.
  
• The acceleration of commoditization in enterprise software and intensifying price-based competition from larger, global players, as well as new entrants leveraging AI and cloud-native technologies, could erode Objective's pricing power, resulting in shrinking net margins and lower win rates in tenders.
  
• Growing geopolitical fragmentation and emerging cross-border barriers may impede international expansion-particularly in newer markets like the U.S. and U.K.-limiting diversification efforts and putting future revenue growth targets at risk.

Objective Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Objective compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Objective's revenue will grow by 5.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 26.4% today to 19.7% in 3 years time.
• The bearish analysts expect earnings to reach A$27.8 million (and earnings per share of A$0.28) by about July 2028, down from A$31.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 32.6x on those 2028 earnings, down from 55.7x today. This future PE is lower than the current PE for the AU Software industry at 74.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

Objective Future Earnings Per Share Growth

Risks

• The company's rapid and successful transition to a SaaS/subscription model, with recurring revenue now at 84% and a continued strong compound SaaS growth rate, increases revenue predictability and margin stability, which may support strong earnings and profit margins over the long term.
  
• Persistent and increasing investment in R&D, with 44% of all-time investment occurring in the past six years and expectations for this to remain at historic highs, is fueling new product innovation, customer retention, and expansion into AI-driven solutions, likely to drive future revenue and support profitability.
  
• Ongoing international expansion, particularly in the U.S., U.K., and other markets, is starting to yield customer wins and a robust opportunity pipeline, which could materially increase revenues and support margin expansion as scale benefits are realized.
  
• Deep specialization and growing penetration in regulated verticals such as government and financial services are leading to multi-year, high-value contracts and providing resilient, predictable cash flows, which support growth in annual recurring revenue and net profit.
  
• Successful migration of large legacy customers to cloud-based platforms like Nexus, with strong revenue uplifts (average 2.2 times uplift), increases recurring revenue and positions Objective to benefit from digitization and automation trends, supporting both top-line growth and long-term operating leverage.

Valuation

• The assumed bearish price target for Objective is A$7.6, which represents two standard deviations below the consensus price target of A$15.54. This valuation is based on what can be assumed as the expectations of Objective's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$20.5, and the most bearish reporting a price target of just A$7.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$141.1 million, earnings will come to A$27.8 million, and it would be trading on a PE ratio of 32.6x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of A$18.6, the bearish analyst price target of A$7.6 is 144.7% lower.
  
• 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.