MoneyTalks: Ron Shamgar on M&A hotness as a bruised ASX tech sector finally sees some upside

MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.

Today we hear from Tamim Asset Management head of Australian equity strategies Ron Shamgar.

What’s hot right now?

For Shamgar it’s all about ASX tech stocks, which have had a rough 2022. While the ASX tech sector is down ~39% over a one-year period, in a positive sign the sector has rebounded ~4% in the past month.

“There’s been a lot of M&A activity in the technology sector in the last couple of months,” Shamgar said.

Among companies with takeover bids is aerial imaging company Nearmap (ASX:NEA), with shareholders due to vote on November 25 on a $2.10/share $1.1 billion bid by US-based private equity giant Thomas Bravo.

Among other tech companies attracting takeover bids are cloud computing outfit Elmo Software (ELO) and donor management system for charities operating in the US Pushpay Holdings (ASX:PPH).

Real estate software provider Proptech Group (ASX:PTG) and MSL Solutions (ASX:MSL), SaaS tech providers to the sports, leisure and hospitality sectors, have also attracted takeover interest.

“We noticed there’s three criteria most of these companies share in common including good revenue growth, a business which is either profitable or on the cusp of positive cash flow and depressed valuation,” Shamgar said.

He said valuations have been very depressed in the current market environment.

“Usually, these businesses prior to the takeover are trading on 2.5 times multiple of their sales.

“A reason we are seeing a lot of these M&As is because we have a weak Aussie dollar to the US so for US tech companies it’s a lot cheaper for these businesses now.”

Top Picks

Readytech (ASX:RDY)

ReadyTech is a provider of education, workforce and government software and has been cashflow positive since it listed three years ago.

ReadyTech has confirmed it’s received a conditional, non-binding indicative proposal from Australian private equity firm Pacific Equity Partners (PEP) to acquire the company by way of a scheme of arrangement at an offer price of $4.50 per share (~$500 million).

“The bid values ReadyTech on about 16.5 times enterprise value to EBITDA multiple, or if you look at a cash EBITDA multiple it’s 30 times, so we think it’s a fair bid,” Shamgar said.

“Although we think PEP could probably offer a little bit more because they can extract some really good synergies from another company in their portfolio called Citadel.”

Citadel provides core software for medical specialists and secure records management software, tech, and professional services to a diversified set of government clients in Australia and the UK.

“The stock is currently trading at about $3.90 so you’ve got about 15% upside to the $4.50 bid and then there’s a small chance of a higher offer once they complete due diligence or maybe someone else comes in and makes a competing bid,” Shamgar said.

Nitro Software (ASX:NTO)

Nitro is a software provider operating in the digital document and signature sector and competes against the likes of Adobe and DocuSign. The company recently announced it had entered into a binding agreement with Cascade Parent Limited, trading as Alludo, to acquire 100% of Nitro at $2/share.

North American-headquartered Alludo is a provider of virtualisation, productivity and professional-calibre graphic solutions for digital remote workforces.

The announcement comes after the company knocked back a bid by Potentia Capital Management last month in favour of exploring the Alludo offer.

“They’re growing their topline revenue at about 25% to 30% per annum and should do about $90 million of ARR this year and are on the cusp of profitability and cash flow breakeven,” Shamgar said.

“Management has agreed to the Alludo deal and that values Nitro at around five times ARR multiple.

“Potentia just last week said they’re happy to pay $2 or even more if they’re able to access due diligence so we think this will end up around $2.20 or $2.40 potentially because it’s an attractive business.”

Shamgar said there is even always the possibility of another bidder entering the bidding war.

“It’s trading at around $2.10 which shows the market is convinced there will be a higher offer than $2 and so it’s definitely worth watching,” he said.

TYRO (ASX:TYR)

Competition is heating up for ASX tech stock Tyro, a provider of EFTPOS terminals and small business loans to merchants around Australia.

Big Four banks Westpac and NAB have expressed interest in the company along with the same private equity firm Potentia Capital Management that’s making a play for Nitro.

“The company has a fleet of about 68,000 EFTPOS terminals and 18,000 of those belong to Bendigo Bank,” Shamgar said.

“They process of in excess of $40 billion of transactions per annum and forecast to make about $40 million of EBITDA this year.”

Potentia has bid $1.25/share for Tyro. Shamgar said the private investment vehicle controlled by software billionaire Mike Cannon-Brookes Grok Ventures owns about 12.5% of Tyro and has accepted the bid on the grounds it is $1.50/share.

Potentia also owns fintech Linkly which connects terminals to point of sales systems.

“There’s a lot of synergies to creating a vertically integrated player with Tyro that probably makes $60 or $70 million EBITDA combined,” Shamgar said.

“We think Potentia will come back with a higher offer but also had confirmation from Westpac and National Australia Bank that they are also interested in Tyro and want the business relationships with the merchants especially because it is strong in hospitality and healthcare sectors.”

Furthermore, Shamgar would not be surprised if more bidders make a play for Tyro.

“We think $2 is where this will end up and currently trading around $1.50 so good upside there,” Shamgar said.

The RDY, NTO, TYR share price today:

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