OCL.AX: My Investment Strategy and Company Valuation
OCL.AX: My Investment Strategy and Company Valuation
It has been an interesting journey analysing OCL.AX, with plenty of ups and downs along the way before reaching an investment decision. My view is that the company has developed a credible strategy to address a significant challenge that is already here: Microsoft 365. This threat is real and material, but management appears to have positioned the business as well as reasonably possible to respond to it. This challenge exists alongside the recent loss of the Defence contract.
Personally, I do not consider the Defence contract loss to be a major factor in my long term investment thesis. I prefer to base long term investment decisions on the overall health of the business, the strength of its moat, and its ability to create value over time. A single contract loss, while meaningful in the short term, does not fundamentally alter that assessment. For that reason, I focused much more attention on Microsoft’s impact, as I believe it represents the largest strategic threat to the business over the next decade.
The Investment Strategy
It is obvious to everyone that the stock has fallen sharply and is now trading at earnings multiples it has not traded at in more than a decade. Technically, it is also respecting the June 2020 support level around $5.97. My analysis therefore focuses on the opportunity presented by current price levels and what the business could look like over the next decade.
The key questions I set out to answer were:
- Is the business healthy?
- Does it have a strong and durable moat?
- Is the market overreacting to Microsoft 365 and the Defence contract loss?
The answers to these questions determine whether the company can maintain the level of financial performance it has achieved historically.
The threat from Microsoft 365 is certainly not a secret. The company discusses it openly, including in its annual reports. The reason is straightforward: Microsoft represents a direct challenge to Objective’s moat. In my opinion, management has been candid about this risk and has responded with a sensible strategy.
Rather than fighting Microsoft directly, Objective has chosen to integrate with it. The acquisition of Simflofy strengthened the Content Solutions segment by reinforcing governance and information management capabilities. The strategy appears to be to allow Microsoft to own the user interface while Objective retains control of data governance, compliance, records management, and the workflows required by government and regulated customers.
To me, this is the best possible response. There is little value in entering a direct confrontation with Microsoft in a market where Microsoft is likely to win. Instead, Objective is focusing on protecting what matters most: the governance, organisation, and compliance layer surrounding customer data.
This strategy will almost certainly result in slower growth for Content Solutions and potentially fewer end users over time. I modelled this effect extensively. The conclusion was clear: Content Solutions is likely to slow, which by itself gives a negative answer to one of my key questions. However, the company has two other segments that are currently growing at impressive rates:
- Planning & Building: ~30% ARR growth
- Regulatory Solutions: ~16% ARR growth
At that point, the maths becomes relatively simple. If Content Solutions slows while the other two divisions continue growing strongly, overall ARR growth can still remain comfortably in double digits.
Can those growth rates be sustained?
To answer that, I undertook a market analysis of both segments. The findings were surprising.
In Planning & Building, the competition is often not another software company. In many cases, councils and government organisations still rely on spreadsheets, manual processes, and internally developed tools. Regulatory Solutions faces a similar situation. These are relatively immature markets with substantial room for digitisation.
Planning & Building, in particular, appears to have a very large addressable market. Objective has a meaningful head start and operates in a market with significant greenfield opportunities and relatively few specialised competitors. The same can be said, albeit to a lesser extent, for Regulatory Solutions.
How Does This Play Out?
To answer that question, I built a dynamic 10 year growth model.
The model incorporates:
- A slowing Content Solutions segment
- Slowing but still healthy Regulatory Solutions growth
- Moderating Planning & Building growth
Rather than assuming current growth rates continue forever, I tapered each segment’s growth over time.
The result was three scenarios:
Scenario Analysis
- Bear Case: 11% Annual Growth
- Base Case: 13.50% Annual Growth
- Bull Case: 15% Annual Growth
For the bear case, I assumed Content Solutions slows from approximately 12% growth to around 5%. For the base and bull cases, I assumed Content Solutions slows to around 7%. To further account for the risks facing OCL.AX, including Microsoft 365 competition, contract concentration, and execution risk, I applied an additional reduction of 2% to the bear case and 1% to both the base and bull cases. I also assumed Regulatory Solutions slows into the low teens and Planning & Building slows to the mid 20’s.
The most important variable in the entire model was Planning & Building. As a result, my long term investment thesis hinges on the continued success of this segment. If Planning and Building can continue scaling, Objective can offset the slowdown in Content Solutions. If it cannot, the thesis weakens considerably.
Valuation
I valued the business using three different approaches:
- Forward PE
- PE Trend Analysis
- Discounted Cash Flow (DCF)
All three approaches produced valuations that were reasonably close to one another, resulting in a base case intrinsic value of approximately $12 per share.
At current prices, the stock trades at roughly a 50% discount to that valuation. In my view, that represents a reasonable margin of safety for a business with a strong operating history, recurring revenue, high returns on capital, and management that has demonstrated strong capital allocation skills over a long period.
My position sizing will range between 25% and 75% of my intended allocation depending on the technical setup. I monitor this using a custom TradingView script.
My current plan is to accumulate shares when the market offers a 30% to 50% margin of safety relative to my base case valuation, which corresponds to a share price between approximately $6 and $8.
Final Thoughts
This is simply how I am allocating my own capital. I am not a financial adviser, nor do I claim to be. I write these posts because they provide an opportunity to challenge my assumptions and gather perspectives that I would not otherwise encounter while researching alone.
As always, it is paramount that everyone conducts their own research. I welcome disagreement and criticism because investing is far from an exact science, and some of the best insights come from people who see the risks differently.
For me, the key question is no longer whether Microsoft 365 is a threat. It clearly is.
The real question is whether Objective’s strategy works.
If Content Solutions stabilises while Planning and Building and Regulatory Solutions continue to scale, today’s share price could prove to be a significant overreaction. If Planning and Building fails to become a meaningful growth engine, then the bear case becomes much more likely.
That’s the bet.