After solid market returns over the last twelve months, valuations have become relatively full across the ASX 200 Industrials Index (ex-resources), with price-to-earnings (PE) multiples rising across most of the market including high-growth technology companies.
While high-growth company valuations at face value appear prohibitively expensive, by taking a more nuanced view of valuation we are confident the Focus Portfolio’s positions in Xero (XRO), Hub24 (HUB) and Technology One (TNE) can continue to outperform over the medium-term, which is explored in this report.
Retaining a structural growth bias
The Focus Portfolio has a bias towards structural growth companies, which is based on our view that earnings growth is the primary driver of share price performance in the long run. Therefore, companies that can consistently compound their earnings above the market should outperform over time.
We define structural businesses as those that we expect to deliver an EPS CAGR of >15% over the next five years and grow their earnings at an above market rate over the next decade-plus, in a manner that is unrelated (albeit not totally immune) to direction of the economic or earnings cycle.
In the examples of XRO, HUB, and TNE, these companies are all experiencing significant secular growth from structural shifts in their respective markets, which will drive sustainable long-term earnings growth:
- XRO – is benefiting from growth in cloud accounting, which is driving significant market share gains.
- TNE – consistent growth is being driven by incremental customer penetration within its niche market verticals and the continual expansion of its product suite to appeal to existing and new customers.
- HUB – is experiencing rapid market share gains as by its specialist platform grows in popularity due to to its superior user experience and functionality compared to legacy platforms.
With the ASX 200 Index offering only pedestrian earnings growth over the medium-term, we continue to see merit in remaining actively invested in sectors like tech that continue to offer attractive earnings growth, however, (as always) prudent stock selection remains critical.
The remainder of this report details our approach to assessing the valuations of high-growth tech companies and reiterates our positive bottom-up investment views towards XRO, TNE, and HUB respectively.
Structural Growth is Afforded a Premium in a Low Growth Environment
From a top-down perspective, higher valuation multiples are justified in high-growth sectors in the current environment given the scarcity of earnings growth elsewhere in the market.
The Australian equity market currently has an unattractive earnings growth outlook, with both the ASX 200 and ASX All Industrials indices offering EPS growth of only ~3% over the next 12 months while the resources sector is expected to deliver negative -8% EPS growth over this period.
However, growth sectors – which we define as IT, Media, and Healthcare – are poised to deliver average EPS growth of +15% over the next 12 months.
Due to the scarcity of growth elsewhere in the market, the areas of the ASX that are offering attractive earnings growth are justifiably being afforded a valuation premium in the current environment.
Our Approach to Valuing High Growth Tech
Alongside a supportive top-down picture, we remain unwaveringly positive towards the Focus Portfolio’s high growth tech exposures (XRO, HUB, and TNE) from a bottom-up perspective.
| Company name | Ticker | 12 mth fwd PE | Consensus EPS CAGR | EPS revisions (LTM) | ||
| 3yr | 5yr | FY25 | FY26 | |||
| Xero | XRO | 73.2x | 33% | 32% | 10.4% | 5.6% |
| Technology One | TNE | 57.3x | 16% | 17% | 0.4% | 2.7% |
| Hub24 | HUB | 54.0x | 36% | 28% | 9.2% | 9.6% |
Source: Refinitiv, Visible Alpha, Wilsons Advisory.
Our approach to assessing the valuation of these companies is based on two key principles.
1. Near-term PE multiples don’t tell the full story
While 12-month forward PE multiples can be a useful tool for valuing more mature businesses, this approach simply doesn’t work for valuing high growth companies, which requires investors to take a longer-term view. Accordingly, we assess forward PE multiples over a 3–5-year time horizon to better encapsulate the future growth prospects of high growth companies in our valuation assessments.
When using a 3 year forward PE multiple (based on CY27 consensus EPS), our high growth tech exposures all trade on PE multiples that are below or broadly in line with global ‘mature’ software comps (based on the 20 largest software companies in the world).
Therefore, given we are confident in the ability of XRO, TNE, and HUB to meet/beat consensus forecasts, we are comfortable that their valuations are not excessive.
2. Consensus upgrades drive sustained outperformance
Analysts tend to underestimate (or be conservative when forecasting) the long-term earnings potential of high quality, high growth companies, which can drive consensus earnings upgrades over time. If a company’s consensus earnings forecasts need to be upgraded by the street, its actual valuation will be lower than it appears when analysing consensus earnings multiples. In this vein, we are confident that XRO, HUB, and TNE can continue to deliver EPS upgrades over the medium-term, which we expect to drive continued outperformance (explored below).
Xero – Still an Attractive ARPU-tunity
Xero (XRO) is held in the Focus Portfolio at a 4% weight.
We still see significant scope for XRO to receive consensus earnings upgrades over the medium to long-term, which will be underpinned by the business lifting its ARPU (average revenue per user) as it leverages its pricing power to further monetise its large and highly sticky subscriber base. Given the high degree of operating leverage within the business, even small upgrades to ARPU will translate to sizeable changes to EPS.
The two key levers available to the business to increase its ARPU are:
1. Price increases
XRO has established a cadence of annual price rises of ~6-9% across its product suite since 2021, which is likely to continue going forward. Between July-September, XRO announced price increases of 6-9% in Australia and New Zealand, 7-10% in the UK, and 3-12% in the US, with industry channel checks indicating these have been absorbed well, with little churn among subscribers.
2. Upselling customers to higher value plans
XRO has become increasingly proactive in driving migration from its lower ARPU plans to higher plans, particularly in Australia, but also more recently in the US.
To achieve this, XRO continues to bundle capability into higher priced plans. XRO also plans to significantly reduce the features available in its lower ARPU ‘Partner Editions’ subscription, cancelling its three Cashbook products (non GST, GST and payroll) by mid-2025, leaving only the Ledger product. With one third of subscribers in Australia on this subscription, this is likely to meaningfully increase ARPU.
In the US, XRO increased the pricing on its ‘Early’ plan by 33%, which strongly suggests that the business is encouraging migration from ‘Early’ to the ‘Growing’ plan, with the latter plan having an ARPU that is 135% higher. In the same announcement, Xero ‘only’ increased ‘Growing’ plan prices by 12%, which further underlines that it is trying to incentivise upward migration.
Technology One – Long Runway for Growth
Technology One (TNE) is held in the Focus Portfolio at a 2% weight.
At Technology One’s (TNE) investor day in July, the company upgraded its ARR (annualised recurring revenues) guidance, bringing forward its $500 million ARR target to 1H25, compared to the prior targets for FY25 and FY26. The company also reiterated its ARR target of >$1bn by FY30, implying a 15% CAGR which we are confident the business will surpass.
We are confident that TNE will see further upgrades, given its demonstrated tendency of under-promising and over-delivering, its low market penetration with <15% market share in every segment, and our visibility into the many levers available to the business to drive ARR growth. These include new customer wins, pricing, new product releases (e.g. DXP Local Government), and up/cross selling to existing customers.
New product and market momentum is strong
TNE’s latest product addition, DXP (Digital Experience) Local Government, has exceeded expectations since its launch. The size of the opportunity is significant (DXP is 22% larger than Student Management and Property & Rating combined). Therefore, we have confidence that DXP will meaningfully contribute to TNE’s top-line growth over time, which doesn’t appear to be reflected in consensus estimates yet.
Meanwhile, TNE’s momentum in the UK continues to track strongly, with its turnaround aided by the Scientia acquisition, product localisation and the TNE culture now embedded. With the flywheel expected to turn in the next 18 months, risks are skewed to the upside in its UK business.
Hub24 – Go with the Inflow
Hub24 (HUB) is held in the Focus Portfolio at a 3% weight
HUB’s recent 1Q25 update highlighted continued momentum, with strong gross inflows of $6.7bn (+35% vs pcp), which was $300m ahead of a particularly strong Q4 and drove continued growth in Custodial FUA (+41% vs pcp).
After significant upgrades to HUB’s consensus FUA and earnings estimates, over the near to medium-term we see scope for further consensus beats/upgrades given:
- Competitor platform forced migration programs (e.g. CFS) are creating opportunities for further share gains, which was reflected in accelerating net adviser additions of +195 in Q1 (vs +143 in Q4, and +15 in pcp).
- High-margin pooled cash levels have stabilised at 7%.
- Improved ASX trading activity is incrementally positive to revenue margins.
- HUB’s increased focus on generating efficiencies from the cost base (rather than accelerating reinvestment) will drive margin expansion as the top line expands.
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.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
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