The New Zealand’s Emerging High-tech Sector – Two Stocks to Consider

I. Sector Landscape and Outlook 

Since 2013, the NZ tech sector has more than doubled in size. This is due to the increase in mature and profitable companies: the country has spawned 65 tech firms with $50m+ revenue, and 34 of those have $100m+ revenue. The median revenue of firms has increased from $13.6m to $26.8m, while the average workforce has climbed from 199 to 319 staff. In the past year, revenue per employee has grown by 8.5%, and has been trending upwards at an average of 3.2% per annum since 2018.

What makes New Zealand an Attractive place to do Tech?

• Maturing sector provides more and more opportunities for growth and employment.
• Skilled workforce and high-quality graduates.
• Good level of Government support for the sector.
• Quality education, health and public services.
• Stable political environment.
• Simple tax system and regulatory environment.

Exhibit 1: IT Market Size Growth in New Zealand

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 

Opportunities in the Sector

New Zealand’s internet connectivity to the world is mainly via the Southern Cross Cable.  Southern Cross’ monopoly on the U.S. route was broken in July 2017, when the US$445 million Hawaiki Cable between New Zealand, Australia, and the U.S. went live.  Hawaiki Cable’s entry into the market provides consumers with a direct high-speed broadband connection between the United States and New Zealand creating new opportunities for American exporters of rich digital content, as well as suppliers of supporting products and services.  Improved speeds for New Zealand’s rural/remote communities offer increased opportunities for a variety of services including entertainment services.  Online video streaming subscription is popular in New Zealand with many consumers turning to on demand TV, away from traditional methods.  The three top sources are Netflix, Disney+, and Amazon Prime.

Exhibit 2: Total Local Production, Total Exports, Imports, 2022.

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

Key Risks and Challenges:

The high-tech landscape is characterized by an unyielding tempo of technological progress, compelling businesses to not only adapt swiftly but also cultivate a culture of continuous innovation. Staying competitive in this dynamic environment necessitates not only embracing emerging technologies but also proactively exploring novel ways to integrate them into products, services, and processes.

The significant trends modelling the tech industry like AI and ML, Edge Computing, cybersecurity evolution, these may test the industries capability of rapid adoption to changing landscapes. Amid these trends, the industry faces its share of challenges, including cybersecurity threats, talent shortages, and the need to navigate complex regulatory environments. However, these challenges also present opportunities for growth, collaboration, and the refinement of strategies.

Exhibit 4. Key Risks in Technology Sector:

Source: Analysis by Kalkine Group

Outlook:

The technology industry in New Zealand has experienced significant growth over the past decade, with more start-ups and tech companies emerging. The industry has been particularly buoyed by the growth of the fintech sector, with several fintech start-ups establishing a presence in the country. Additionally, the NZ government has made significant investments in the technology industry, including the establishment of innovation hubs and the provision of grants to support the development of tech companies

Some of the emerging trends in the technology industry in New Zealand include the growth of artificial intelligence, automation, and data analytics. These trends are enabling businesses to streamline their operations and improve their decision-making processes. Additionally, there is a growing focus on cybersecurity, with more companies investing in secure IT infrastructure to protect against cyber threats.

Apart from the sector-specific factors, an analysis on 2 NZX-listed companies is provided. This report covers their insights, outlook, performance and potential as expected to be delivered in the near to medium term.

1) Solution Dynamics Limited (Recommendation: Hold, Potential Upside: Low Double-Digit) (M-Cap: NZD 22.66 million, Annual Dividend Yield (TTM)¹: 7.42%)

Business Description:

Solution Dynamics Limited (NZX: SDL) is engaged in delivering print and digital customer communications management services.

Outlook:

SDL has narrowed its focus to key vertical markets, such as sectors with cross-border mail, or where the Company has competitive advantage based on sector domain knowledge and the ability to utilise distributed print capability.

Difficult macroeconomic conditions as higher interest rates effect economic growth are making sales cycles longer and more difficult, however, the changed focus has resulted in a developing pipeline of prospects.

Technical Overview:

SDL Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, while experiencing a downtrend, SDL’s stock prices are rebounding from the low of 2020, anticipating for a minor rally. Moreover, the momentum oscillator RSI (14-period) is heading north from the midpoint, adding further evidence for the mentioned recommendation. Prices are fluctuating between its previous peak and trough, which might function as resistance and support levels for the stock, respectively. A significant support level for the stock is positioned at NZD 1.473, while critical resistance level is located at NZD 1.705. 

Stock Recommendation

Considering the aforementioned factors, a ‘Hold’ rating is given on the stock at the closing market price of NZD 1.55 per share, down by 27.57% as on 1^st February 2024.

2) Enprise Group Limited (Recommendation: Speculative Buy, Potential Upside: Low Double-Digit) (M-Cap: NZD 11.76 million)

Business Description:

Enprise Group Limited (NZX: ENS) is a software and services investment company. The Company operates through two segments: Kilimanjaro Consulting and iSell. 

Outlook:

Increased competition and consolidation are expected within the partner channel, as the Acumatica product gains popularity. Kilimanjaro consulting division aims to continue to provide exceptional service to its Exo clients for at least the next decade. A new initiative will identify clients that wish to move to the cloud, and a separate team will manage the implementations of those Exo clients transitioning from Exo to MYOB Advanced (Acumatica)

Technical Overview:

ENS Daily Technical Chart, Data Source: REFINITIV

Technical Commentary

On the daily chart, ENS’s stock prices are undergoing a downtrend characterized by lower lows and lower highs, indicating a negative bias. In addition, the momentum oscillator RSI (14-period) is trading below the midpoint, providing further support for the previous observation. Prices are trading below both the trend-following indicators 21-period and 50-period SMAs, which might function as dynamic resistance levels for the stock; in contrast, the stock’s most recent low may act as a support. An important support level for the stock is situated at NZD 0.549, while crucial resistance level is placed at NZD 0.649. 

Stock Recommendation

Considering the aforementioned factors, a ‘Speculative Buy’ is given on the stock at the closing market price of NZD 0.59 per share as on, down by 37.3% as on 1st February 2024.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: Past performance is neither an indicator nor a guarantee of future performance.

Note 2: The reference date for all price data, currency, technical indicators, support, and resistance levels is February 1, 2024. The reference data in this report has been partly sourced from REFINITIV.

Note 3: Investment decisions should be made depending on an individual's appetite for upside potential, risks, holding duration, and any previous holdings. An 'Exit' from the stock can be considered if the Target Price mentioned as per the Valuation and or the technical levels provided has been achieved and is subject to the factors discussed above.

Note 4:  Annual Dividend Yield is on a Trailing Twelve Month (TTM¹) basis and are subject to change based on factors such as company performance, stock price changes, etc.

Technical Indicators Defined: -

Support: A level at which the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest. Support 1 refers to the nearby support level for the stock and if the price breaches the level, then Support 2 may act as the crucial support level for the stock. 

Resistance: A level at which the stock prices tend to find resistance when they are rising, and an uptrend may take a pause due to profit booking or selling interest. Resistance 1 refers to the nearby resistance level for the stock and if the price surpasses the level, then Resistance 2 may act as the crucial resistance level for the stock. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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