Top 3 ASX AI Stocks To Buy in 2023

Published on 9th May 2023

1. TechnologyOne Limited (ASX: TNE)

Technology One Limited is an Australia-based company, which is engaged in the development, marketing, sales, implementation, and support of integrated enterprise business software solutions. The Company’s segments include Software, Consulting, and Corporate. The Software segment consists of sales and marketing, research and development, and software-as-a-service (SaaS) platform. The Consulting segment is responsible for services in relation to its software. The Company’s enterprise business software solutions include TechnologyOne Enterprise Asset Management, TechnologyOne Financials, TechnologyOne Human Resource and Payroll, TechnologyOne Enterprise Budgeting, TechnologyOne Supply Chain, TechnologyOne Property and Rating, TechnologyOne Student Management, TechnologyOne Business Intelligence, TechnologyOne Enterprise Content Management, TechnologyOne Performance Planning, TechnologyOne Spatial, TechnologyOne Enterprise Cash Receipting, TechnologyOne Stakeholder Management and others.

On 22 November 2022, TechnologyOne (ASX: TNE), announced its financial results for the year ended 30 September 2022.

TNE posted record results demonstrating its excellent performance for the thirteenth consecutive year.

Group revenue reported 18% growth on pcp to $369.4m. Total Annual Recurring revenue increased by 25% on pcp to $320.7m.  SaaS and Continuing Business reported revenue growth of 22% on pcp to $358.7m. SaaS Annual Recurring Revenue (ARR) of $274.2m, up 43%.

Group PBT (Profit before tax) posted at $112.3m, up by 15% on pcp. Profit after tax recorded at $ 88.8, 22% growth on pcp.

Maintained robust balance sheet with net assets of $239.1m, up 26% and cash and cash equivalents of $175.9 million, up 22%.

Cash Flow Generation reported at $77.2 million for the full year. TNE announced a special dividend of 2.0 cents per share in addition to its final dividend of 10.82 cents per share. The dividend for the full year has increased to 17.02 cents per share (including the Special Dividend), up 22% on the prior year, and in line with its Net Profit after tax growth of 22%

Outlook:

TNE has built a strong user base, utilizing its SaaS Technology. The technology is used across different segments or sectors to take care of their critical activities. TNE closed 20 major deals in FY22 with $63.9 million in total contract value and it now covers more than 320 council customers in APAC. TNE’s presence across the Education sector with 10 major deals cracked and closed in FY22, for a total contract value of $47m further cements its position as the leading provider to the APAC Higher Education sector, including large deals at customers such as the Queensland University of Technology and the University of Technology Sydney. The integration of leading higher education software provider Scientia is progressing well. Scientia positioned as the only higher education software provider to offer to schedule and timetabling as part of an end-to-end ERP solution empowers 50% of the UK and 75% of the Australian higher education market. The acquisition and integration in the TNE platform have already created the first full SaaS offering of the product in just six months, with 16 customers now contracted to transition onto the TNE SaaS platform. These customers now have full visibility and access to TechnologyOne’s entire ERP, reducing the friction for them to adopt the rest of the CiA product suite. The complete transition from an on-premise legacy licence business to a SaaS business without losing the customer base and delivering healthy returns demonstrates the solid foundation of the company and its business model. Annual recurring revenue contributes 90% of the total revenue, represents the majority of its revenue, and is locked at the start of the financial year. The company remains well on track to surpass its target of $500m+ ARR by FY26. TNE forecast  group margins to improve to 35%+ in the coming years, driven by the significant economies of scale from its single instance multi-tenanted global SaaS ERP solution.

Technical Analysis:

(Chart source: TradingView) Monthly Candlestick Price Chart Pattern

The overall bullish trend remains intact. The resistance at $13.6 once breached will trigger the price to new highs in the near to medium term. The indicators holding in positive territory further support the bullish view of the stock.

Veye’s Take:

TNE’s transition from an on-premise legacy licence business to a SaaS business and now complete exit from its legacy license business was implemented in a systematic way. TNE ERP platform provides a complete solution to the number of critical functions or activities being addressed by the varied sectors. TNE, a technology-driven company continues to invest in new, exciting ideas and innovations, including Solution as a Service, App Builder and its Digital Experience Platform (DXP) for Local Government and Higher Education. Its 16th product, DXP LG, was released for general adoption in June 2022. TNE Solution as a Service where the entire outcome will be delivered at a faster rate, with little risk and in one single annual fee to its customer will prove a game changer, further enhancing the future growth profile. TNE with its investments across the R&D capabilities to upgrade its platform to serve the customer needs, and integration of Scientia in its platform provides it with solid opportunities from its APAC and UK customers. TNE is now migrating its customers to its next-generation SaaS ERP, CiA, that will provide them with an advantage of new technologies, such as Artificial Intelligence and its new Digital Experience Platform (DXP). 

2. Altium Limited (ASX: ALU)

Altium Limited is an Australian-based multinational software company. The Company is engaged in development and sales of computer software for the design of electronic products. It provides printed circuit boards (PCB) tools and cloud platform for the electronics industry. Its products include Altium 365, Altium Nexar, Altium NEXUS, Altium Designer and Altium CircuitMaker. The Company operates through three segments: Board and Systems, Electronic Parts, Search and Discovery business, and Microcontrollers and Embedded Systems. Board and Systems segment includes results from the PCB business for the Americas, EMEA, China and Asia- Pacific, Altium Nexus as well as other products sold through partner channels and the manufacturing business. Electronic Parts, Search and Discovery business segment includes the results from Octopart and Upverter. Microcontrollers and Embedded Systems Includes results from the TASKING business.

On 20 February 2023, Altium Limited (ASX: ALU) announced its financial results for the half-year period that ended on 31 December 2022.

(Graphic Source: Company Reports)

The group posted revenue growth of 17% from US $102.2 million in 1H22 to US $119.5 million (US $124.8 million on a constant currency basis, up 22%). Design software contributed US$91.6 million of revenue and the cloud platform contributed the remaining US$27.9 million of revenue.

EBITDA increased by 24% from US$34.8 million in 1H22 to US$43.3 million. EBITDA margin was maintained at 36.2% when compared with an EBITDA margin of 34.1%, indicating the operational excellence of the company. The group posted a profit before tax of US$39.2 million, up by 35% from $29 million in 1H22.

PAT was up by 30% to US$29.6 million from US$22.9 million in 1H22. Group reported an enhanced earnings profile with EPS growth of 29% on 1H21 to 22.53 cents. Improved operating cash flows by 1% and cash and cash equivalents of US$205.3 million, a growth of 5% from 1H22 provides a solid cash flow profile. The company declared an Interim dividend of AUD 25 cents up by 19% when compared with AUD 21 cents in 1H22.

Outlook:

(Source: Company Reports)

The strong adoption of Altium 365 and transition from Perpetual to Term-based licensing is progressing well, accelerating its average subscription seat value, thus will enhance the recurring revenue trajectory and hence overall profitability profile of the company.

The subscription pool increased to 58,030 at the end of the half from 55,978 one year earlier and is well on its target to exceed 60,000 subscribers for the full year.

The group expects the momentum to continue and projects total Revenue of US$255 million to US$265 million, with growth of 15%-20% in FY23. This revenue growth will be contributed by its two segments Design software, expected to deliver US$195 million to US$200 million of revenues, approximately 15%-18% growth, and Cloud Platform to deliver revenue of US$60 million to US$65 million representing 20%-30% growth. Underlying EBITDA margin to range between 35%-37%. With stronger uptake of higher-value subscription seats the company expects to achieve a total revenue of $500 million and an Underlying EBITDA margin of 38%-40% by FY26.

Technical Analysis:

(Chart source: TradingView) Monthly Candlestick Price Chart Pattern

The stock has maintained long-term support at $32 and is trading well above the 14-day EMA (Exponential Moving Average) indicating upside potential in the stock. The stock holds minor support at $35.93 and is expected to bounce back after taking the support.

Veye’s Take:

ALU with a market cap of  $4.86 B as of 22 February 2023 is well placed to disrupt the way electronic products are designed and manufactured. The company is creating a strategic partnerships for the benefit of customers who are highly motivated to pursue digital transformation but who have the low organizational capability to implement enterprise software for electronics. ALU with its excellent technological capabilities holds strong potential to capitalize on this $2 trillion electronic industry market space. The shift from the standard product to the higher subscription at a higher rate from the existing customers and strong adoption of Pro and Enterprise platform capabilities increasing subscription seats from the existing as well as new customers is expected to continue and drive the revenue profile of the company. The transition from perpetual licenses to Term-based licenses resulted in strong revenue growth. Term Licenses increased by 40% of all new licenses up from 31% one year earlier. Recurring revenue increased to 79% of total revenue from 74% half-over-half. The growing adoption of Altium 365 adoption resulted in monthly active users growth of over 33,500 in February, up 36% from August 2022, and monthly active accounts were over 12,000 up 29%. The growth momentum is expected to continue, driving its revenue growth and profitability matrices and changing the electronic designs space. The stock though trading at a higher PE of 87.64x is expected to witness improved PE to 45.1x in the next twelve months and improve to 33.15x by FY25 indicating significant earnings growth.

3. IMDEX Limited (ASX: IMD)

Company’s Profile

IMDEX Limited (ASX: IMD) is a leading global Mining-Tech company, which enables successful and cost-effective operations from exploration to production. At IMDEX we develop cloud-connected devices and drilling optimisation products to improve the process of identifying and extracting mineral resources for drilling contractors and resource companies globally. Our unique end-to-end solutions for the mining value chain integrate our leading AMC and REFLEX brands. Together they enable clients to drill faster and smarter, obtain accurate subsurface data and receive critical information in real-time. Our vision is to be the leading provider of real-time subsurface intelligence solutions to the global minerals industry.

 

On 13 February 2023, IMDEX Limited (ASX: IMD), reported its first half results for the 2023 financial year (1H23).

Group revenue was up by 18.4% from $167.8 million in 1H22 to $198.8 million. Excellent operations resulted in EBITDA growth of 3.7% from $51.5 million in the pcp to $53.4 million. Normalised EBITDA grew by 21.9% from $51.5 million in 1H22 to $62.8 million resulting in a Normalised EBITDA margin of 31.6%, up by 0.9% from the pcp.

(Source: Company Reports)

Group NPAT was down by 6.9% to $22.7 million and EPS was down by 8.1% to 5.7 cents. Pre-tax cash from operations to EBITDA was reported at $56.3m, up by 46%. As on 31 December 2022, the group maintained a cash of $32.5 million, up by 8% on the pcp. Declared a 1H23 fully franked interim dividend of 1.5 cents per share. The group maintained normalized return on equity of 19% and normalized return on capital employed at 24%.

Outlook:

Expanding its footprints in other markets:

The acquisition of Krux will position IMDEX as a leading provider in the global drilling analytics market. This acquisition will strengthen Imdex’s ability to generate and analyze drilling data, fast-track the delivery of its next-generation IMDEX Mobile software and Measure While Drilling offering, and support the digitization of its Drilling Optimization business. Additionally, this acquisition will provide IMDEX with greater access to enterprise customers, particularly in the North American market.

Acquisition of Devico well aligned with the growth strategy: The acquisition of Devico is in line with the growth strategy as it brings together Devico’s established product range, cloud-based technologies, customer network, and market reach, which perfectly complement IMDEX’s business. The impressive financial metrics of Devico, including a 3-year CAGR revenue of 17%, 3-year CAGR EBITDA of 33%, and strong cash flow conversion of 79% in CY22, make it an attractive acquisition opportunity for Imdex Limited. Devico’s financial stability and profitability position it as an ideal target for Imdex Limited’s growth strategy, allowing the company to leverage its successful business model to drive future growth. With the acquisition of Devico, Imdex Limited can capitalize on its financial strength and proven growth strategies to achieve sustainable growth in the global mining-tech industry.

Technical Analysis:

(Chart source: TradingView) Monthly Candlestick Price Chart Pattern)

The stock has maintained its 200-day EMA (Exponential Moving Average) support on a weekly chart but is still trading below the 14/50-day EMA. With support well intact on a daily and weekly chart the stock price is expected to bounce and trade higher in the near to medium term.

Veye’s Take:

IMDEX has made significant progress in the first half of the year, increasing its stake in Datarock to 40.9%, successfully advancing its planned 40% investment in Krux, and merging IMDEX and Devico businesses. These milestones have bolstered IMDEX’s growth strategy and reinforced its position as a leading global mining-tech firm. IMDEX is well-positioned to take advantage of the strong growth opportunities in the core and mining production markets, driven by increasing demand for real-time orebody knowledge, deeper reserves, and a robust development pipeline of technologies. With the potential Krux investment and Devico acquisition, IMDEX has the opportunity to strengthen its market-leading position further. Moreover, the company expects to generate additional commercial revenues from BLAST DOG prototypes in FY23, and its Digital 2.0 project is on track to optimize costs. While decarbonization targets have led to a heightened need for exploration, nonferrous global exploration budgets remain low. However, major mining clients are reporting ongoing or expanded exploration budgets. Improved margins (year-on-year), a debt-to-equity ratio of 14.35% and trading at a PE multiple of 21.7x provides it with an attractive value proposition. 

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