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Technology Stock Picks for 2020

We continue to be positive on the technology sector in Australia. In an environment of low interest rates and low growth, we believe there are a number of good quality stocks in the sector with reasonable to strong growth outlooks.

We acknowledge many stocks in the sector have had a strong re-rating over the past couple of years but believe there is still some value in the sector with a number of good quality stocks on reasonable forward PE ratios. Our goal is to find good quality tech stocks with strong growth outlooks that are currently trading on forward PE ratios of around 25x or less and that, over time, can re-rate up to over 30x as has happened with stocks like WiseTech Global (WTC) and Altium (ALU).

CITADEL GROUP (CGL)

Citadel is a software and services company that provides integration and managed service solutions to state and federal government departments and the private sector in Australia. The company has had a tumultuous 2019 with a disappointing FY19 result and the resignation of the CEO which have resulted in a significant fall in the share price. This, however, provides an opportunity as the company is not broken and in fact is getting better with investment in technical, delivery and sales capabilities that ultimately will deliver a much higher percentage of repeatable revenue across a much broader customer base. In our view the stock looks good value on an FY20 PE ratio <20x.

UNITI GROUP (UWL)

Uniti is a diversified provider of telecommunications services, specialising in fixed-wireless, fibre and specialty telecommunication services. The company has grown rapidly through a number of acquisitions over the past 12 months and is now a strongly profitable and highly cash generative business. Uniti looks set for further strong growth over the next 12 months through both organic growth and likely further acquisitions and is well positioned to fund this growth with a strong Balance Sheet as well as the cash generated from the existing businesses. The stock looks reasonable value on an FY21 PE ratio of <30x.

ADACEL TECHNOLOGIES (ADA)

Adacel is a leading global provider of simulation and control systems for the civil aviation and defence sectors. The company had a difficult FY18 and FY19 which was driven by the loss of a key contract with the FAA in the US and a cost blowout on a contract with DSNA of France. FY20, however, has started much better with the company reiterating its guidance at the FY19 result in August and then slightly upgrading the guidance at the recent AGM in November. Importantly the problems on the DSNA contract now appear behind the company and there appears good potential for further contracts. The stock looks very good value on an FY20 PE ratio <15x.

Authored by Chris Savage – Industrials Analyst at Bell Potter Securities, 17 December 2019
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Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended.
Disclosures:
Uniti Group (UWL):
Bell Potter Securities acted as lead manager of UWL’s IPO in February 2019 and capital raisings in May and August 2019 and received fees for that service.