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The information technology sector has been languishing in the past year. But it’s all the more reason why investors should take a closer look, according to equities analyst James Samson, of Lincoln Indicators.

“Since the tech wreck, IT stocks may still be seen as volatile growth opportunities,” he says. “However, this attitude is changing as more companies begin to place greater emphasis on the role IT plays. High levels of customisation within IT systems coupled with an entrenched need for quality have become accepted traits of many businesses. IT is now a far greater priority in the strategy and success of a business. With the evolution of cloud computing, the hype has begun in tech markets once more.”

Consequently, Samson argues IT companies are presenting investors with much more stable investment opportunities than in the past, while retaining growth traits.

The IT sector consists of about 110 companies for a market capitalisation of about $12.25 billion. It’s relatively small market capitalisation may say something about company and sector risk when compared to S&P/ASX 200 market capitalisation of $1.157 trillion on June 21, 2011. According to Standard & Poor’s, the IT sector has been disappointing, posting a negative annualised price return of 7.76 per cent in the past 12 months to May 31, 2011. In contrast, the S&P/ASX 200 recorded a positive annualised price return of 6.29 per cent over the same period. However, Samson believes the performance of the IT sector will improve and become more consistent in response to an ever increasing and innovative role technology will play in managing and generating business.  

Samson says cloud computing is a shining example of innovation and it highlights “the need for businesses to be adaptive to technological changes”. He says his choice list consists of financially healthy companies well placed to benefit from renewed investor focus in the IT sector.

Hansen Technologies (HSN)
Market capitalisation: $145 million
Price/earnings ratio: 10.67 times
Share price: 93 cents


Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)


Provides billing and rating systems to companies mostly in the energy, utilities and telecommunications sectors. The company generates about 40 per cent of revenue overseas, but Samson says it’s weathered the effects of a rising Australian dollar courtesy of a “natural hedge” in labour costs as offshore accounts for about 30 per cent. “Despite currency headwinds, Hansen recently upgraded earnings guidance,” Samson says. “Given the liquid and advancing nature of billing systems globally (for example, the rollout of smart utility meters), this company is well placed to take advantage of this opportunity.”

TechnologyOne (TNE)
Market capitalisation: $333 million
Price/earnings ratio: 17.38 times
Share price: $1.05


Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)


Specialises in software solutions, with offices in Australia, New Zealand, Malaysia and the United Kingdom. The company services a broad market, including big corporations, government departments, universities and statutory authorities. After a positive half-year report, Samson expects the company to generate earnings growth of between 10 and 15 per cent this financial year despite increasing marketing and sales costs. “Should cash reserves remain high, shareholders could potentially benefit via a special dividend, or other capital management measures,” he says.

Iress Market Technology (IRE)
Market capitalisation: $1.17 billion
Price/earnings ratio: 23.13 times
Share price: $8.98


Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)


In financial circles, Iress Market Technology is widely known for its branded stockmarket and wealth management software systems in Australia, Canada, New Zealand and South Africa. Services predominantly include real-time data, analysis and news. Samson says as a market leader, the stock offers defensive qualities. “To complement these defensive qualities, the company’s dividend yield is above 4 per cent and this has been reasonably consistent in recent years,” he says. “The company’s financial health is strong.”

SMS Management and Technology (SMX)
Market capitalisation: $416 million
Price/earnings ratio: 14.18 times
Share price: $6.22


Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)


An outsourcing IT and consultancy firm servicing businesses in Australia, the UK and Asia. “What’s pleasing is the company’s high level of repeat business from existing clients in the financial and government sectors,” Samson says. “While we believe that IT consultancy represents more risk than a software or hardware provider, the importance of an efficiently run IT department is becoming increasingly vital to businesses. SMS offers investors with quality exposure to this segment.”

Legend Corporation (LGD)
Market capitalisation: $72 million  
Price/earnings ratio: 9.85 times
Share price: 33 cents


Chart: Share price over the year to 24/06/2011 versus ASX200 (XJO)


Legend Corporation focuses on the design, engineering, manufacturing and provision of electrical, electronic and customised hardware. It offers a diverse range of products, including integrated circuit boards, memory modules,  electric cables and hydraulic tools. Samson says Legend is a financially healthy company, generating good growth over recent periods. “However, with a small market capitalisation of about $72 million, investors do need to be aware that this company is very much at the emerging end of the market,” he says.


>>Back to the newsletter to view other articles – June 25th 2011


Market capitalisation and price/earnings ratios at June 21, 2011
Share price at June 24, 2011

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