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ASX technology shares should not be overlooked

Australian investors seeking growth opportunities should not overlook a select group of Australian technology stocks that withstood the pandemic and have strong growth prospects.

Some tech is growing despite COVID

Macquarie Securities analysts reveal that some technology stocks have continued to grow throughout the COVID-19 crisis as the disruption has accelerated the digitisation of the economy that has been occurring for years.

Macquarie says: “Given few companies have guidance, NEXTDC (ASX: NXT), Bravura Solutions (ASX: BVS) and Readytech Holdings (ASX: RDY) stand out for guiding to double-digit earnings growth in a contracting economy.

“Technology stocks were among the best relative performers with Nearmap (ASX: NEA) up 10%, Appen (ASX: APX) 9.3% and Zip Co (ASX: Z1P), up 9% versus the ASX 200.”

NEXTDC experienced higher demand for data centres as more people have been working from home. There has been no slowdown in the sales pipeline for new enterprise contracts to date, with many customers accelerating the digital transformation plans.

“NXT is one of few companies with guidance in the market, and with demand strong, they reaffirmed guidance for FY20 EBITDA of $100 million to 105 million.”

Bravura Solutions has not been materially impacted by the pandemic but has seen delays in the sales pipeline. Despite this, it maintained guidance for FY20 net profit after tax growth at around 15%.

Macquarie says the company expects the sales pipeline to rebound as clients seek to improve their digital capabilities while managing the evolving regulatory environment.

Nearmap has not had a significant impact from Covid-19 as its customers base is diverse and the larger enterprise customers in less cyclical industries continue to fare better. However, it did double its customer retention team to support customers that were impacted by the pandemic.

“Nearmap’s target for cashflow breakeven was pulled forward to June 2020 and management expect to hit the target with cost optimisation.”

Readytech has retained its earnings guidance and expects earnings growth of around 20 per cent at an EBITDA margin of 40 per cent. Some of Readytech’s sales cycles will take longer due to the pandemic but some of its customers are increasing their focus on digital solutions.

Zip Co has benefitted from the shutdown of most physical stores and the move to online shopping. It saw an increase in new customer accounts, repeat purchase customers and businesses signing up.

“With concerns around the credit cycle top of mind for investors, Zip Co highlighted adjustments to their machine-learning algorithm had been made to lower spending limits and to lock dormant accounts.”

BKL & consumer shares staples in focus

Consumer staples is another sector that has been able to withstand significant impacts of COVID-19, particularly with a one-off boost from panic buying.

Blackmores has seen a demand for immunity products, equating to around 10% of sales. But the benefit is offset by a lack of sales in other ranges.

In addition, Inghams benefitted from the initial panic buying of food in March. This has now settled to a new normal.

Some of the companies that will continue to suffer as a result of consumer hardship include Link Administration (ASX: LNK), mortgage broker Australian Finance Group (ASX: AFG) and AGL Energy (ASX: AGL).

Link Administration processed early super payments of $3.65 billion for over 500,000 members, leading to a closure of 5.4 per cent of accounts. It’s e-conveyancing platform PEXA saw lower volumes of property transactions.

AGL expects pandemic related hardship will lead to an increase in bad debts this year and a further increase in FY21.

Mortgage broker AFG notes that 4.6% of their book is already in hardship and lodgements were down 69% in April as AFG lowered its risk appetite and increased pricing.

“Fiscal stimulus has supported spending during hibernation, but measures could also be hard to withdraw while unemployment remains high.”

This article was written by Annabelle Dickson, writer for Inside Adviser. 

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