Global Presence Provides Boost to NZ Technology Space- Opportunities for Investors

Summary:

• Diversified sources of revenue might help the broader technology sector to sail through uncertain times.
• Increased global presence and robust fundamentals are expected to act as primary growth catalysts moving forward.
• Global fintech market is expected to reach USD 305.7 billion by 2023, and fintech is the fastest-growing segment of the New Zealand technology sector.
• Economic slowdown could be another factor which might hinder IT sector growth.

New Zealand’s information and communications technologies (ICT) sector is diverse, covering wireless infrastructure, health IT, digital content, payments, geospatial, telecommunications, agricultural technology and more. It is a breeding ground for innovation and competes successfully on the world stage.  New Zealand's ICT companies have earned an international reputation for being flexible, resilient, adaptable, and entrepreneurial. Overall, NZ’s IT industry is being characterized by global presence, robust fundamentals, resilient nature and stable business prospects. The fintech sector, which redefines the way we do financial transactions including the way we borrow, lend, save, spend, store and transfer money, is the fastest growing sector in technology space.

As compared with 2017, in 2019:

• Sales of ICT software and services were worth $9.8 billion, up 31 percent
• Sales of published software rose 49 percent to $3.1 billion
• Sales of IT services increased 24 percent to $6.8 billion
• Exports of IT software and services were 21 percent of the total sales of ICT software and services, up from 19 percent.

Overview of Tech Sector (Source: NZ Tech)

Fintech Sector in New Zealand

According to the report by NZ Tech (October 2019), the fintech sector has the potential to provide the best opportunities for future economic growth in New Zealand.

• New Zealand tech sector is now the 3rd largest export sector for New Zealand, with many contributors coming from the fintech sector including Xero, Pushpay, Invenco, Vend, Data Torque and Transactions Services Group.
• There is an opportunity for New Zealand FinTech companies to develop and export AI-driven financial services products, with markets like the UK having big potential for sales.

Range of Investment Options Might Help Broader IT Sector

According to the Ministry of Business, Innovation & Employment (2019 Edition), the NZ Tech export sector is growing faster than ever before. Coupled with the fact that profitability grew three times faster than revenue in FY2018, indications show that there are plenty of options for investment.

Revenue Over Time (Source: Ministry of Business, Innovation & Employment)

Diversified Sources of Revenue Provides Visibility for Growth

The broader IT sector has been garnering revenues from different geographies which could help it in reviving the global slowdown.

• Australia

Australia remained the largest export market for the top 200 NZ tech exporting companies and grew by 10.8% in 2018. The Australian market continues to serve as an important stepping-off point for globally expanding NZ tech companies, as well as providing significant levels of investment. Artificial intelligence company, FaceMe, completed its NZ$15M Series A funding round, led by Australian Alium Capital.

• Asia

Asia is becoming an increasingly attractive market for NZ tech companies, with the top 200 companies recording a respectable growth rate of 9.6% in 2018. Global technology giant, Tencent, has also made several investments in New Zealand’s gaming sector, purchasing Grinding Gear Games, and investing in RocketWerkz.

• North America

North America continues to be a highly attractive export market for the top 200 NZ tech export companies, returning the largest dollar growth of any offshore market at $289 million.

• Europe

Europe was the fastest-growing export market in 2018, with a growth rate of 16.7% accompanied by a high number of acquisitions by high growth NZ tech companies in this region.

Global Revenue Sources (Source: Ministry of Business, Innovation & Employment)

Drivers of Technology Sector- A Brief Look

Technology sector of NZ has many contributions to its credit. Products from New Zealand are seen as trustworthy, innovative, and of high quality, worldwide. A culture of ingenuity distinguishes New Zealand export technology from its overseas competitors.

• New Zealand tech sector and innovation have continued to grow over the years, thereby, highlighting the economic and social importance. The government has set strategic priority on transforming New Zealand into a digitalized nation.
• The foundation for a successful digital nation includes connectivity, cybersecurity, digital access, education, and trade. The rapid rise in Artificial Intelligence (AI) technologies offers major opportunities for the country.
• Application of AI technologies in agriculture, government, manufacturing, and services industries will ensure the future prosperity of the nation. Further, Internet of Things (IoT) creates a great future for New Zealand by connecting data, devices, and people to seize opportunities for economic growth.
• There has been a rapid rise in the number of firms in the IT sector. In 2019, the number of tech firms in New Zealand increased by 3% to 21,870. A strong pipeline of promising startups is expected to drive continued growth.
• Given the image of high-quality product producers, some of these small firms may emerge one day as major exporters of software from the country. These firms are not only growing in numbers, but they are also creating job opportunities in the country. It heartening to see that while other sectors are forced to contract under the impact of COVID-19, tech firms are maintaining their growth momentum and hiring people.

Growing digitization and increased use of information and communication technology across the economy will help generate employment across a range of skill sets. Several global industry leaders prefer New Zealand as a base for their operations.

Challenges Faced by IT Sector

There have been discussions on how technology could impact jobs. New Zealand’s future prosperity will largely depend on how well it is able to adopt technology rather than treat technology as a threat. The government needs to remove all restrictions to firms adopting technologies and help New Zealanders gain the most from the innovations and adapt effectively to change. Given the fact that IT sector is 3^rd largest export sector for NZ, it is exposed to foreign exchange fluctuations. Appreciation of domestic currency will make IT products costlier in export markets, thereby adversely impacting earnings potential of the firms within the sector. Also, the inward looking policies being followed by many countries might adversely affect the growth of IT sector.

Since we now have a broad idea of the technology sector, it is now time to have a quick look at the performance of some companies operating in the sector (GTK, ERD, PLX, IKE)

1. Gentrack Group Limited (NZX: GTK) (Recommendation: Buy, Potential Upside: Lower Double-Digit) (M-Cap: ~NZ$142.04 million, Gross Dividend Yield: 2.955%)

Business Description: Gentrack Group Limited (NZX: GTK) provides essential software for essential services, pairing powerful platforms with deep market knowledge to help utilities and airports lower service costs, foster innovation and confidently navigate market reform.

Key Metrics (Source: Refinitiv (Thomson Reuters))

Outlook: The COVID-19 pandemic had no material impact on the company’s operations for the first half and business continuity plans and working from home enabled it to continue to operate largely unaffected. Notwithstanding the impact of the economic downturn, the company expects to deliver a second-half EBITDA result ahead of the first half and to remain cash-flow positive.

Key Risks: The company is exposed to credit risk, liquidity risk and market risks which include foreign currency risk, commodity price risk and interest risk.

Valuation: The company is well-positioned to emerge from the current difficult market conditions and return to consistent profit growth. We have applied EV/EBITDA based relative valuation (on an illustrative basis), and the target price reflects a rise of lower double-digit (in % terms). Thus, we give a “Buy” recommendation at the current market price of NZ$1.440 per share.

EV/EBITDA Based Relative Valuation (Source: Refinitiv (Thomson Reuters))

2. EROAD Limited (NZX: ERD) (Recommendation: Hold, Potential Upside: Mid-Single-Digit, M-Cap: ~NZ$221.22 million)

Business Description: EROAD Limited (NZX: ERD) develops technology solutions that handle vehicle fleets, improve driver safety, support regulatory compliance, and reduce costs associated with driving.

Key Metrics (Source: Refinitiv (Thomson Reuters))

Outlook: Despite economic uncertainty across all markets, the company remains well-positioned for FY21, reflecting its strong customer value proposition, future contracted income and diverse customer base across regions, business size and industry.

Key Risks: The company is exposed to credit risk and liquidity risk. Liquidity risk is the risk that the company would not be able to meet the financial obligations as and when they become due and payable.

Valuation: While uncertainty results in longer sales lead-times, it remains confident in continued unit growth across all three markets, albeit it is likely to be lower than delivered in FY20 and previously anticipated for FY21. We have applied P/BV based relative valuation (on an illustrative basis), and the target price reflects a rise of mid-single-digit (in % terms). Thus, we give a “Hold” recommendation at the current price of NZ$3.240 per share.

P/BV Based Relative Valuation (Source: Refinitiv (Thomson Reuters))

3. Plexure Group Limited (NZX: PLX) (Recommendation: Buy, Potential Upside: Lower Double-Digit, M-Cap: ~NZ$157.22 million)

Business Description: Plexure Group Limited (NZX: PLX) is a mobile engagement software company. The company’s software integrates with operational systems to remove friction as well as create a seamless purchase experience for consumers.

Key Metrics (Source: Refinitiv (Thomson Reuters))

Outlook: With the increased sales and marketing activity in the US, the company’s pipeline of prospective customers has grown significantly; however, it expects that, in the near-term, sales conversion may take longer in a COVID-19 world. On TTM basis, the company’s P/CF multiple stood at 33.8x, which is lower as compared to the broader industry average (technology) of 63.2x.

Key Risks: The company is subject to a number of financial risks including liquidity risk, credit risk and market risk. It does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The company also faces the risk of movements in foreign currency exchange rates against the New Zealand dollar.

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands with upper band suggesting overbought status while lower band oversold status, and yellow lines are Fibonacci projection lines.

Despite softer close in the previous week, the on-going week is proving to be week of resilience for the stock. On this date of July 9, 2020, the stock has given close at $1.120 which is close to weekly high of $1.140 thereby exhibiting strength in uptrend. Technical indicator RSI with around 71 reading and curve pointing up at the end, suggests strong bullish momentum for the stock. However, RSI reading of 71 also suggests that the stock has reached in overbought zone.

Going forward, if the stock continues with its uptrend then it may have resistance around $1.2373 whereas support could be around weekly low of $0.950.

Thus, we give a “Buy” recommendation on the stock at the current price of NZ$1.120 per share.

4. ikeGPS Group Limited (Recommendation: Speculative Buy, Potential Upside: Lower Double-Digit, M-Cap: ~NZ$74.68 million)

Business Description: ikeGPS Group Limited (NZX: IKE) is a technology company that seeks to be the standard for collecting, analysing, and managing pole and overhead asset information for electric utilities, communications companies, and their engineering service providers.

Key Metrics (Source: Refinitiv (Thomson Reuters))

Outlook: Although the company’s North American customers did experience a substantial slow-down in activity from March to May 2020 due to the sudden uncertainty created by Covid-19, their operations have resumed in June, even with the continued presence of Covid-19 across the U.S. ‘Shelter-at-Home’ orders across the U.S. are exempting companies deemed “Critical Businesses” that includes IKE and its target customers, being communications companies, electric utilities, and their associated engineering service providers involved in constructing and maintaining Critical Infrastructure.

Valuation: Operationally, IKE has transitioned its U.S. operation to mostly remote working, while its New Zealand operation is back to “in-office” status in the Level-1 environment. On TTM basis, the company’s EV/Sales multiple stood at 8.1x while industry average (Industrials) stood at 25.9x.

Key Risks: The company is exposed to foreign currency risk on its sales and a significant portion of its expenses that are denominated in USD, which is different from its presentation currency.

Technical Overview:

Weekly Chart –

Source: Refinitiv (Thomson Reuters)

Note: Purple colour lines are Bollinger Bands with upper band suggesting overbought status while lower band oversold status, and yellow lines are Fibonacci retracement lines which measure price rebound and backtrack.

The stock has given softer close for the on-going week having closed at low price of $0.73 which is above 20 period SMA thereby suggesting that the bullish trend for the stock is intact. Technical indicator RSI with around 49 reading suggests gaining of momentum for the stock.

Going forward, the stock may have resistance around $0.855 as provided by the upper Bollinger band while support could be around 38.2% retracement level of $0.663.

Thus, we give a “Speculative Buy” recommendation at the current market price of NZ$0.730 per share.

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.