Acquisition Of CouncilWise Will Accelerate Cloud Transitions And Improve Efficiency

Key Takeaways

• The acquisition of CouncilWise is set to accelerate cloud adoption, enhancing revenue growth in the Government segment.
  
• AI-driven efficiencies are expected to improve productivity and margins, potentially boosting earnings through optimized costs across operations.
  
• Product readiness issues, high acquisition costs, and competition in cloud technologies could hinder revenue growth and strain cash flow, affecting overall earnings.

Catalysts

Provides technology-based solutions in Australia.

• ReadyTech's enterprise strategy is showing strong promise with a $13.5 million immediate pipeline at shortlisted or preferred stages, expected to close in H2 FY '25. This suggests potential revenue growth as these deals close and contribute to future sales.
  
• The acquisition of CouncilWise is anticipated to rectify product readiness issues in the Government segment, thereby accelerating cloud transitions and boosting revenue growth in this sector.
  
• The company is targeting $160 million to $170 million in revenue by FY '27, supported by a robust enterprise pipeline and improved product readiness, which indicates expectations of revenue expansion.
  
• ReadyTech is leveraging operating leverage and increasing efficiency, aiming for cash margins greater than 20%, which will likely improve net margins in the medium to longer term.
  
• AI-driven operational efficiencies are expected to enhance productivity, supporting margin expansion and potentially higher earnings as they optimize costs across R&D and customer service.

ReadyTech Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ReadyTech Holdings's revenue will grow by 11.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -13.1% today to 11.4% in 3 years time.
• Analysts expect earnings to reach A$18.7 million (and earnings per share of A$0.16) by about March 2028, up from A$-15.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$22.1 million in earnings, and the most bearish expecting A$14.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.9x on those 2028 earnings, up from -22.6x today. This future PE is lower than the current PE for the AU Software industry at 59.5x.
• Analysts expect the number of shares outstanding to grow by 1.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

ReadyTech Holdings Future Earnings Per Share Growth

Risks

• Delays and underperformance in the Government segment due to product readiness issues could hinder revenue growth and impact overall financial performance negatively, particularly in revenue and cash flow.
  
• The need to end certain legacy assets and integrate new acquisitions like CouncilWise suggests potential challenges in product development and integration, which could increase costs and delay expected revenue gains.
  
• There is competition and risks in the transition to and adoption of cloud technologies and AI, which could affect ReadyTech's ability to achieve its target margins if not managed effectively, impacting net margins.
  
• Operating cash flow conversion being affected in the first half, if not corrected in the second half as planned, could lead to liquidity strains and impact the ability to reinvest in growth, affecting overall earnings.
  
• Dependency on achieving a high close rate of the enterprise pipeline could present risks; if these do not materialize as expected, it could lead to missed revenue targets, impacting revenue and earnings projections.

Valuation

• The analysts have a consensus price target of A$3.659 for ReadyTech Holdings 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$4.5, and the most bearish reporting a price target of just A$3.05.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$163.6 million, earnings will come to A$18.7 million, and it would be trading on a PE ratio of 30.9x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of A$2.85, the analyst price target of A$3.66 is 22.1% 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.