Equity Strategy
28 May 2025
Reweighting Our Convictions
Off-Cycle Reporting Offers Insights to Inform Our Positioning
 

The out-of-season reporting cycle has revealed important results that allow us to assess where companies we cover stand in relation to our theses.

Following on from last week’s deep dive into Aristocrat Leisure (ALL) and Xero (XRO), where we reaffirmed our convictions despite mixed results (ALL disappointed while XRO impressed), this week also delivered more mixed results. TechnologyOne (TNE) posted an outstanding result, while James Hardie’s (JHX) guidance disappointed. 

However, our convictions slightly changed after this week’s results. TNE’s strong momentum in customer wins and its generation of more average recurring revenue (ARR) per existing customer leads us to have even higher conviction in the company. In contrast, JHX guided for a decline in North America volumes in FY26, whereas we (and consensus) expected positive growth. While this is not a thesis break, it is a delay to our thesis of recovering industry conditions and JHX volumes driving a re-rate, which we still do eventually expect. 

As a result, we are downweighting JHX by 1% and have used that as funding to upweight TNE by 1%. This report further explores the two results, and underlines our decision to slightly adjust the weightings of these two companies in the Focus Portfolio. 

Figure 1: Most companies that reported out of season have seen downward revisions, although there were a few standouts
 
 

TechnologyOne – The One Technology Company That Keeps Delivering

TechnologyOne has been upweighted by 1% to 3% in the Focus Portfolio

TNE posted a stellar 1H25 result, continuing its outstanding operational momentum. Notably, TNE upgraded FY25 profit before tax (PBT) growth to +13-17% (from +12-17%), which remains conservative due to the company’s propensity to beat guidance and the fact that only +6% YoY growth is needed in the second half, with TNE’s YoY growth not falling into single digits in a half since 2H21. On the back of this strong result and our confidence in its ability to drive further consensus upgrades into the long-term, we have upweighted TNE by 1% to a 3% position in the Focus Portfolio.

Figure 2: TechnologyOne 1H25 key numbers
A$m 1H25A 1H25e %YoY vs consensus
PBT 81.9 77.2 33% 6.1%
ARR 511.1 516 21% -0.9%
Revenue 285.7 276.2 19% 3.4%
EPS 19.08 18.2 27% 4.8%
FCF 24 9 n.m. 166.7%
R&D 68.8 66.3 20.9% 3.8%
Rule of 40 49.40% 5.1%
NRR 118% 116.75% 1% 1.25%
Churn 0.30% 1.25% -0.95%

Source: TechnologyOne company filings, Visible Alpha, Wilsons Advisory.

Figure 3: Management has consistently delivered PBT growth at the high end of guidance

Attractive product pipeline is driving a high net recurring revenue

TNE’s impressive net recurring revenue (NRR) (ARR generated from existing customers) of 118% (vs consensus 116%) demonstrated the strong value-add generated from the company’s continually developing product suite, which substantially increases revenue generated from existing customers. This is a key growth pillar, as reaching 115% NRR yearly results in revenue doubling every five years without adding new logos (customer wins). 

This result gives us confidence that the continued take-up of its best-in-class product suite will sustain its high NRR, which includes:

  • SaaS+ (Solution as a Service) – This offering integrates previously separate software, support and ongoing upgrades into a single platform with one all-inclusive fee. This reduces the disjointed and lengthy (over six months) implementation process, with a target of 30 days by FY28.
  • DxP (Digital Experience Platform) – This is a suite of cloud-based solutions designed to enhance user engagement by delivering self-service digital experiences, which includes recent upgrades to DxP Local Government.
  • CiA (Connective Intelligence Anywhere) – There is an ongoing transition from the legacy Ci product to fourth generation CiA, which allows enterprise customers to manage operations from any device at any place.
Figure 4: NRR – TNE will continue to extract 15-20% ARR growth yearly from existing customers (from the end of the prior year)

Continuing momentum in new logo adds in key verticals

In addition, TNE is continuing its ARR momentum with significant customer wins. Each additional major customer win serves as another reference point to build its reputation to gain further traction. Significant wins this half included:

  • Islington Council – TNE’s first win in a London Borough, this is a large opportunity given the scale of the London market. To highlight the total opportunity, the UK Local Government has 185 Counties/Districts (TNE has 28), 127 Unitary Authorities (TNE has 6), 36 Metro Boroughs and 32 London Boroughs.
  • Australian Energy Regulator (AER) – The new Australian Federal Government Panel has listed TNE as a pre-qualified supplier for enterprise software and IT services, delivering TNE its first Federal Government win with the AER. With the resurgence of ‘Buying Australia’, this panel should deliver TNE more big wins against the likes of SAP.
Figure 5: TNE is expected to deliver 15%+ ARR growth to reach $1b ARR in FY29, with upside risk

TNE’s multiple is defendable given its growth and operational execution

Despite trading at a high short-term multiple (12 month forward P/E of 80x), this is justifiable given its growth (PBT 20% CAGR from FY25-29), supported by a large conversion opportunity for existing customers (SaaS+ and CiA) as well as strong new/updated products and major customer wins. When accounting for its significant growth, its medium-term FY28 P/E and EV/EBITDA of 52x and 29x, respectively, is a reasonable valuation.

Figure 6: Given its strong growth runway, TNE's medium-term valuation is reasonable
 
 

James Hardie – Siding With Caution

James Hardie has been downweighted by 1% to 3% in the Focus Portfolio

Although JHX delivered a solid FY25 result, its FY26 guidance was disappointing. Notably, North America volumes were guided to be negative, falling short of expectations of +3% growth. 

Figure 7: While JHX’s FY25 result was solid, its guidance for its North America operations was worse than expected
US$m FY26 guidance FY26e vs consensus
North America net sales growth LSD growth 6.3% Miss
North America adjusted EBITDA LSD growth 7.8% Miss
North America adjusted EBITDA margin 35% 35.4% Slight miss
North America volume change LSD decline 3.2% Miss
FCF >500 314 Strong beat
Capex 325 489 Significantly less

Source: James Hardie company filings, Visible Alpha, Wilsons Advisory.

The repair and remodel (R&R) market is less resilient than expected

Although leading industry indicators have pointed to a soft backdrop, management commentary that the R&R market is weaker than new construction came as a surprise, as R&R indicators have been less weak than new construction indicators. Continued declines in big ticket R&R activity in particular drove JHX’s weak outlook. This has re-based our expectations, given that JHX is weighted towards R&R, which is supposed to be more defensive than new construction.

Figure 8: NAHB surveys indicate that residential construction professionals have a more favourable outlook for remodelling compared to homebuilding
Figure 9: Harvard’s Leading Indicator of Remodelling (LIRA) has forecasted a slight recovery in remodelling activity

James Hardie must deliver synergies from its AZEK acquisition

JHX has sold-off materially following the merger announcement, as the market was disappointed with the high multiple offered for AZEK (35x), the dilution of JHX’s traditionally high ROIC and the increase in leverage (from 0.5x to 2.8x). However, with the extent of the sell-off, the current valuation doesn’t price in any upside from the deal. 

This gives JHX management an opportunity to deliver, through realising the promised US$125m in cost synergies and US$225m in commercial synergies (cross-selling across overlapping channels). 

There are also mitigating factors to the three main concerns:

  1. As a material part of the offer is scrip which is tied to JHX’s share price, the offer is now only at a 12% premium to AZEK’s 30 day pre-announcement VWAP due to the sell-off, compared to 26% on the announcement date. This yields an implied takeover multiple of 31x, which is more reasonable. Furthermore, at the current, smaller premium, there is a risk that AZEK shareholders reject the offer, which the market would view positively (about JHX). Any further decline in JHX’s share price increases that probability further.
  2. Despite the dilution in ROIC, consensus has AZEK’s ROIC increasing materially in the medium-term, resulting in less dilution to the combined company in the medium-term.
  3. JHX management is targeting a reduction of its post-merger leverage down to 2x by the end of the second full fiscal year after the transaction has closed.
Figure 10: AZEK’s takeover premium has become less appealing after JHX’s sell-off, raising doubts as to whether AZEK shareholders will approve the transaction
US$ Announcement date (24/03/25) Current
Cash per share 26.45 26.45
JHX share price 29.43 23.25
Scrip deal (JHX shares for each AZEK share) 1.034 1.034
Scrip per share 30.43 24.04
Total consideration per share 56.88 50.49
AZEK 30 day VWAP pre-announcement 45.14 45.14
Premium 26% 12%
Implied takeover multiple (P/E) 35.1 31.2

Source: James Hardie company filings, Visible Alpha, Wilsons Advisory.

Downweighting but still retaining exposure

Our original upside case for JHX was the start of a recovery in industry conditions in FY26 due to rate cuts, but this disappointment leads to our decision to trim our position by 1% down to 3%. However, we still retain a material position in JHX as at its forward P/E is just 15x (well below its five year average of 21x), it isn’t pricing in any upside from recovery in North America or synergies from the AZEK merger. Although delayed, we remain confident that the US housing market will eventually recover and as seen in Figure 11, JHX’s P/E has tended to rebound during an industry upturn in North America (higher volumes), with the company historically trading above 25x as the cycle peaks. It is clear that with patience, its current value is still compelling. 

Figure 11: JHX’s valuation is at the bottom of the cycle, with a re-rate in the medium-term likely as the industry recovers
 
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Written by

Greg Burke, Equity Strategist

Greg is an Equity Strategist in the Investment Strategy team at Wilsons Advisory. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.

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