Technology and Classifieds: February reporting wrap
About the author:
- Author name:
- By Nick Harris
- Job title:
- Senior Analyst
- Date posted:
- 10 March 2023, 7:00 AM
- Sectors Covered:
- Telecommunications, Technology
- With February reporting season behind us, we review the key themes and summarise our forecast changes across our coverage universe.
- Our preference remains for high quality names (XRO, REA and SEK). We also upgraded Megaport Ltd (ASX:MP1) and Objective Corporation Limited (ASX:OCL) to Add ratings based on a more compelling risk/reward.
In December 2022 we changed our technology sector view from ‘underweight’ to ‘neutral’. We remain comfortable with this view and continue to expect substantial volatility until interest rates find a base. We retain a neutral weighting on Classifieds and continue to favour the larger free-cashflow generating names.
Interest rates look to be nearing a top. Expectations have edged closer to ~4.5% by mid-CY23. Once the top is found, we expect quality technology and classified names to once again shine.
Key takeaways from February reporting season
Pre-results we were forecasting 18% and 14% YoY revenue growth across the tech and classified companies in FY23 and FY24, respectively. Post-results this has slowed to 15% and 12%, respectively. The quality names continue to grow their revenue at multiples of GDP.
On average, expense cuts were not large enough to offset revenue reductions in FY23 but they resulted in EPS upgrades in FY24. Excluding loss-making companies, we now forecast 18% YoY EPS growth in FY23 and 16% in FY24. This was previously 23% and 13%, respectively. This EPS trajectory shows tech companies are tightening their belts and continue to grow at multiples of GDP.
Our FY24 Free Cash Flow forecasts we reduced, as cost reductions were not large enough to offset slowing revenue growth. Non-profitable tech companies are pushing hard to reach profitability without requiring extra equity capital.
Demand for BAU tech spend with enterprise and government customers remains robust with no notable slowdown in customer demand. Discretionary spend is slowing with some new tech projects put on hold. Businesses are commonly looking to ‘optimise their budgets’ to achieve more with less.
Computer chip supply remains a challenge but slowing demand combined with product substitution means the bottleneck is starting to thaw. New fabrication plants come on line in CY24, which should alleviate supply problems.
For the Classified players, key thematics include a focus on BAU costs, albeit with existing investment initiatives maintained and flexing pricing power. We note consistent commentary of expected yield growth in 2H23 (primarily price driven) to help offset moderating volumes to a degree.
We expect that, given the relative value they create, quality tech names should continue to push through price rises with limited impact on demand.
Our top picks in the tech sector are Xero Limited (ASX:XRO), Rea Group Ltd (ASX:REA) and Seek Ltd (ASX:SEK).
Figure 1: Australian tech basket index (EV/EBITDA is ~10% above its 20 year average)
Source: Morgans estimates, company data, Factset as at 6/3/2023
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