MoneyTalks: Why beaten down ASX tech stocks are hot takeover targets

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 Merewether Capital portfolio manager Luke Winchester.

What’s hot right now?

‘Tis the season for M&A activity. Winchester said the big theme he’s seeing right now is takeovers among ASX tech stocks, with bids for beaten-down companies coming in almost daily.

He said in the past few months tech names Nearmap (ASX:NEA), Elmo (ASX:ELO), Nitro (ASX:NTO), Infomedia (ASX:IFM), Pushpay (ASX:PPH), Tyro (ASX:TYR)and ReadyTech (ASX:RDY) have all received some sort of offer from private equity.

“Most of them have seen their share prices smashed and the weak AUD also makes the value more attractive for large US-based firms,” Winchester said.

He said most of those ASX tech stocks targeted are in the mid-cap space ~$500 million to $1 billion but earlier this week there was a bid for ~$75 million market cap Proptech Group (ASX:PTG) for a ~130% premium.

“Unfortunately Merewether Capital didn’t own PTG but it shows acquisitions could be coming for the small guys as well,” he said.

“It’s always risky having an investment thesis that relies on a takeover but it can provide valuation support at times.”

Top Picks

Merewether Capital holds three tech stocks that could find themselves with larger peers or private equity sniffing around.

Xref (ASX:XF1)

The HR software’s core product is an automated reference-checking module but it is also expanding into other verticals and growing internationally.

“XF1 could find themselves as a strategic target for a larger HR software peer to flesh out their modules if they don’t have adequate reference checking or look to acquire XF1’s blue-chip customer base to potentially cross-sell other services too,” Winchester said.

“That revenue isn’t subscription recurring may be one barrier, but with $20 million sales last year on a $55 million market cap and profitable as well should be appealing in this environment.”

Prophecy International (PRO)

PRO offers two software solutions under one corporate banner.

“Snare is cyber security monitoring and logging software, obviously very topical in this current environment particularly as Medibank Private (ASX:MPL) struggled to grasp how deeply they were hit by their hack,” Winchester said.

“Their call centre analytics software eMite saw a sharp spike in business when Covid-19 hit as physical call centres were forced into work from home and required much better software solutions to track productivity.”

He said unlike XF1, PRO is recurring revenue and $18m ARR on a $55m market cap so looks cheap especially given the growth and tailwinds.

8Common (8CO)

8CO is an expense management software that recently was awarded more than $2 million worth of tenders under the Federal Government GovERP program.

The company has designed a Whole of Australian Government (WoAG) template, specifically for the GovERP program to provide greater functionality for Federal Government agencies.

“A bit different to the other two where I think even a generic private equity buyer would see the appeal in the valuation and growth,” Winchester said.

“That contract and relationship with the Federal Government could be seen as very strategically appealing, not just for peers in the expense management space, but any IT managed services business who work alongside the Government and is looking to offer more proprietary solutions.”

“With a $21m market cap, 8CO’s current ARR is not large at ~$3.5m but with the Federal Government contract in hand it likely grows to $7-8m in the next few years.”

The XF1,PRO, 8CO share price today

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