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.
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.
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.
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:
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:
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.
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.
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.
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$225m in commercial synergies (cross-selling across overlapping channels).
There are also mitigating factors to the three main concerns:
US$ | 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.
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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