Digital Transformation Backing the Expansionary Phase in NZ’s Tech Sector

I. Sector Landscape and Outlook 

As per the ‘Immigration New Zealand’, a part of the Ministry of Business, Innovation and Employment (MBIE), a New Zealand Government department, New Zealand's tech sector is diverse and advanced. It has cemented its ground for innovation and competes successfully on the world platform. The industry is prominent and strengthening business in New Zealand, contributing approximately 8% for GDP and employing 5% of the workforce. Exports have been steadily growing to reach $7.4 billion in 2019, making tech the country’s third-largest export sector.

Service Industries Increased by 1.1% in March 2021 Quarter

As per Stats.NZ, GDP for March 2021 quarter over December 2020 quarter increased by 1.6%. The service industries, which make up approximately two-thirds of the economy, increased 1.1% and goods-producing industries, which make up about one-fifth of the economy, increased 2.4%. However, during the same period last year, GDP for March 2020 quarter over December 2019 quarter fell by 1.6%. Service industries fell 1.1% and goods-producing industries decreased 2.7%, in the same period.

This indicates that the economy is on the path of economic recovery, driven by external demand and higher commodity prices. Further growth is dependent on widespread vaccination of populations around the world and effectively containing the pandemic.

Exhibit 1: GDP by Industry, Change from December 2020 Quarter to March 2021 Quarter

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Analysis by Kalkine Group

Industry Strategy by the Government of New Zealand

As per the ‘Digital Technologies Industry Transformation Plan’ (ITP), released by the Ministry of Business, Innovation, and Employment, in June 2019, the New Zealand government introduced its Industry Strategy, releasing its plan to grow strong and innovative industries in New Zealand. Further, in response to the impacts of COVID-19, the strategy was updated in June 2020. ITPs are long-term plans created in partnership with Government and industry, formulating a vision and an action plan for a sector. The New Zealand technology development is summarized under three broad categories:  

• Artificial Intelligence: The government identified a strong desire for AI strategy to maximize the socio-economic benefits of AI while mitigating the risks of the same. As per the research, jointly done by MBIE, it has examined the potential for AI to drive economic growth, its possible labour market impacts, government use of AI, as well as social improvement applications of AI.
• Māori Tech Success: Existing initiatives include, Kōkiri, a 12-week kaupapa based startup accelerator supported by Callaghan Innovation and PGF funding for marae connectivity to ensure rural and urban marae are digitally enabled
• Growing More Exporting Firms: Callaghan’s Digital Sector team has identified this and has been focusing on creating and boosting a pipeline of these companies to be global-ready. Callaghan is working with NZTE to provide end-to-end support.

Exhibit 2: The State of Digital Technology Sector

Data Source: This work is owned by the Ministry of Business, Innovation and Employment which is licensed by the Crown Copyright for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Analysis by Kalkine Group

In June 2021 Quarter Versus March 2021 Quarter, the Unemployment Rate Fell to 4.0%

As per Stats.NZ, in the June 2021 quarter the unemployment rate decreased to 4.0%, the underutilization rate decreased to 10.5%, and the employment rate increased to 67.6%. In the year to the June 2021 quarter, wage rates rose 2.1%, average weekly earnings (for full-time equivalent employees (FTEs), including overtime) rose to $1,360.62, and average ordinary time hourly earnings increased to $34.76.

Further, the seasonally adjusted unemployment rate decreased to 4.0% in the June 2021 quarter, decreased from 4.6% last quarter. For men, the unemployment rate fell to 3.8%, down from 4.6 percent last quarter. For women, the unemployment rate fell to 4.3%, down from 4.6%. The seasonally adjusted number of unemployed people decreased to 117k, down 17k, or 12.4%. This is the largest quarterly percentage fall since the HLFS series began in 1986. 12k fewer men were unemployed, and 5k fewer women were unemployed.

Exhibit 3: Labour Market Statistics: June 2021 Quarter

Data Source: This work is based on/includes Stats NZ’s data which are licensed by Stats NZ for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Created by Kalkine Group

Index Performance:

The S&P/NZX All Information Technology (Industry Group) Index generated a 1-year return of ~17.13% as compared to ~10.35% by the S&P/NZX 50 Index.

Exhibit 4: The NZX All Information Technology (Industry Group) overperformed NZX50 Index by ~6.78% in one year period:

Source: REFINITIV

Key Risks and Challenges:

The use and development of an IT platform is a critical success factor as it is dependent on designing, implementing, operating, maintaining, and monitoring the same. The speed of change, complexity and changing requirement in the technology sphere is impacting the industry. Broadly, the industry is exposed to risks that include cybersecurity, information security, IT systems development projects, IT governance, outsourced IT services, social media use, mobile computing, IT skills among internal auditors, emerging technologies, board, and audit committee technology awareness.

Exhibit 5. Key Risks in Information Technology Sector:

Sources: Analysis by Kalkine Group

Outlook:

As per the New Zealand Ministry of Foreign Affairs and Trade Manatu Aorere, the Ministry has collectively stated an ambitious target to push exports, by 2025, to 40% of GDP. The Ministry has a reasonably good understanding of most parts of the export sectors, but one of the least well-understood sectors is ‘commercial services’, which is identified as dynamic, fast-growing, and largely weightless and if supported well, it has the potential to be an above-the-line driver of export growth. Commercial services comprise of but are not limited to, services such as computer services, engineering, royalties, and license fees, accounting and legal services, audio-visual services, and merchanting.

Exhibit 6. Key Attractive Factors to Do Tech Business in New Zealand:

Data Source: This work is owned by the Ministry of Business, Innovation and Employment which is licensed by the Crown Copyright for reuse under the Creative Commons Attribution 4.0 International Licence; Chart Analysis by Kalkine Group 

Apart from the sector-specific factors, we have also analysed four NZX-listed companies operating in the same sector. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) Gentrack Group Limited (Recommendation: Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$198.88 million)

Business Description:

Gentrack Group Limited (NZX: GTK) provides essential software and services to the utility and airport industry.

Outlook

As per the market announcement released on 27 May 2021, FY21 revenues are expected to be slightly ahead of FY20 revenues of $100.5 million. FY21 EBITDA is expected to be around $10 million. Further, it expects net cashflow to be positive in FY21, building on the $16.8 million of net cash reported as of 30^th September 2020.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period) 

Stock Recommendation

We have applied EV/Sales based relative valuation (on an illustrative basis) and the target price reflects a rise of low double-digit (in % terms). We have applied a premium to EV/Sales Multiple (NTM) (Peer Average) considering revised upside revenue guidance for FY21 and improved asset turnover at 0.24x in H1FY21 versus 0.21x in H1FY20.

For relative valuation, we have taken peers like Plexure Group Ltd. (PX1.NZ), Vista Group International Ltd. (VGL.NZ), and Laybuy Holdings Ltd. (LBY.AX).

Considering the aforesaid facts, we give a “Buy” recommendation on the stock at the current market price of $2.0 per share, (New Zealand Time: 12:23 PM (GMT +12) on 12^th August 2021.

2) Smartpay Holdings Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZ$183.48 million)

Business Description:

Smartpay Holdings Ltd (NZX: SPY) is a leading provider of full-service EFTPOS, the central electronic payment processing platform across Australia and New Zealand markets. It provides services to more than 25,000 merchants with around 35,000 EFTPOS terminals.

Outlook

The company is seeing positive results from investment in both marketing and sales functions in Australia with record levels of lead generation and new terminal sales. These positive outcomes combined with acquiring revenue and gross margin per terminal have had a positive effect on cash generation which the company plans to invest in marketing spend and sales resources to meet the growing demand for products.

The company is eyeing to further augment its offerings in both Australia and New Zealand markets in FY22. It is also emphasizing on expanding its brand awareness and boost its competitive product offering in Australia. This is expected to further aid in providing scale to its Australian revenue and drive EBITDA growth.

Daily Price Chart

Source: REFINITIV

Note: The purple color line in the chart depicts RSI (14-period), while the green color histograms at the bottom of charts represent volumes. The sky-blue and red color lines show 50-Period SMA and 21-Period SMA respectively.

SPY's prices witnessed a downside correction from the higher levels in the recent past and now hovering around the major support level of NZ$0.775, indicating the possibility of an upside direction hereon. The recent fall in the stock is not supported by volumes, indicating a weakening of the downtrend. However, on a weekly chart, the leading indicator RSI (14-period) is trading in negative territory at ~40.88 levels. Now an immediate resistance level for the stock appears at NZ$0.880 while support is at NZ$0.700 level.

Stock Recommendation:

The company has witnessed a significant reduction in its net debt (excluding convertible notes) to $4.7 million at the end of March 2021. Its sustained focus on the existing in-store SME payment network in Australia has resulted in a run-rate EBITDA of $9.8 million in March 2021.

Considering the aforementioned factors along with its continued investment towards new offerings and marketing capacity, scalability in business, and decent liquidity position, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.77 per share, down 3.14% on 12^th August 2021.

3) ikeGPS Group Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZ$145.50 million)

Business Description:

ikeGPS Group Limited (NZX: IKE) is a technology company that designs, sells, and delivers solutions for the collection, analysis, and management of distribution assets for electric utilities and communications companies.

Outlook

As per the presentation released on 11 August 2021, the company reported a 300% growth in new contracts versus pcp, indicating confidence around the potential for substantial revenue growth in FY22. Recurring subscription and transaction revenues have increased in absolute and relative terms in Q1FY22 with the growth of +12% on pcp and +30% on a constant currency basis as NZD:USD fx rate shifted from c $0.60 to c $0.70.

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

IKE prices are getting correction from higher levels after a significant upward move. Prices are getting support of an upward sloping trend line. The CMP is above the 21-period and 50-period SMA with a positive crossover, providing support for a positive direction. RSI (14-period) is hovering at ~51 that indicates indecision in the stock. Immediate support level is at NZ$1.06 while immediate resistance is at NZ$1.15.

Stock Recommendation

Considering the aforesaid facts, we give a “Hold” recommendation on the stock at the current market price of $1.09 per share, down 1.80% on 12^th August 2021. 

4) PaySauce Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZ$42.92 million)

Business Description:

PaySauce Limited (NZX: PYS) offers cloud-based software to manage the human resource of the customers, from contracts to digital timesheets, payroll, banking, and filing to small and medium-sized businesses in New Zealand.

Outlook

The company finished Q1FY22 with the accelerated customer and revenue growth. Processing fees from customers increased 44% YoY, driven by a 39% rise in customer numbers and a 51% YoY increase in the value of payroll processed through the PaySauce platform. Total recurring revenue for Q1FY22 increased 36% YoY. This measure includes both processing fees and interest income. The continued low-interest-rate environment has resulted in interest income declining 33% YoY. At $31k, interest revenue was just 5% of the total Recurring Revenue in Q1FY22 although the float of funds held on behalf of customers is increasing in line with customer growth.

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Note: The purple color line in the chart shows 50-period SMA and the yellow color line represents trend line. The green color line represents RSI(14-period).

On the daily chart, PYS’ stock price witnessed a breakout of the downward sloping trend line at NZ$0.308 level (on July 08, 2021). Since the breakout, prices are continuously trading above the trend line support zone. Moreover, the prices are trading above the trend-following indicator 50-period SMA, indicating a positive trend. The momentum oscillator RSI (14-Period) is trading at ~48.08 levels. An important support level for the stock, is placed at NZ$0.30, while key resistance level is placed at NZ$0.33.

Stock Recommendation

Overall employees paid through the PYS platform rose substantially by 44% YoY to 20k in Q1FY22 and the total payroll business customers increased by 39% to 3,933.

Considering the traction in payroll processing, acceleration in its customer base, resilient Q1FY22 performance, and its growth strategies, we give a “Hold” recommendation on the stock at the current market price of $0.310 per share, down by 1.59% on 12^th August 2021. 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Disclaimer

Kalkine New Zealand Limited is authorised to provide class advice only. The information on this site does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.