Why Objective Corporation Limited (ASX:OCL) is a Top Pick for EPS Growth Investors in 2025

Objective Corporation Limited (ASX:OCL), a leading provider of software solutions for regulated industries, has emerged as a compelling opportunity for investors seeking high EPS growth in 2025. Despite its elevated valuation multiples, a closer look at its accelerating earnings trajectory, margin catalysts, and strategic positioning relative to peers reveals a stock primed for outperformance. Let's dissect the case for OCL as a top pick.

Accelerating EPS Growth: A Foundation of Consistent Outperformance

OCL's earnings growth has been nothing short of remarkable. In FY2024, its basic EPS rose to $0.34, a 19.65% jump from FY2023's $0.28. However, this figure understates the true growth story. When adjusting for a critical accounting policy change in FY2023—which reduced R&D expenses by expensing only 50% of spending—the normalized EPS (using the prior method) rose from $21.1 million in FY2023 to $27.2 million in FY2024, a 29% surge. This growth trajectory is not just cyclical but structural, driven by OCL's transition to recurring revenue models and R&D investments in high-margin software solutions.

Margin Catalysts: High Gross Margins and the Path to Operating Leverage

While OCL's net profit margin dipped slightly to 26.4% in FY2024 from 26.66% the prior year, its gross margin remains robust at 93.94%, reflecting the inherent scalability of its software business. The slight margin compression stems largely from increased R&D spending to fuel product innovation and market expansion. However, this is a strategic investment with clear payoffs:

1. Recurring Revenue Growth: Shifting from perpetual licensing to subscription models reduces customer churn and creates sticky revenue streams. This transition has already boosted free cash flow margins to 42.23% in FY2024, a testament to OCL's operational efficiency.
2. Product Pipeline: Investments in AI-driven tools and regulatory compliance software are set to launch in 2025, positioning OCL to capture high-margin opportunities in industries like healthcare and finance.

Analysts project that operating margins could rebound to 35%+ by 2026 as these initiatives scale, reversing the FY2024 dip.

Valuation: Overpriced or Undervalued? A Case for Relative Value

Critics argue OCL's P/E ratio of 55.4x makes it overvalued compared to peers like Iress (16.2x) and Bravura (12.9x). However, this view ignores two critical factors:

1. Growth vs. Value Mispricing: OCL's earnings growth of ~29% (normalized) far exceeds the 5.8% average growth rate implied by its PEG ratio of 9.5x. This suggests the market has underappreciated its growth potential.
2. Peer Comparison Nuances: While OCL's P/E is higher than the peer average, it trades at a 28% discount to RPMGlobal (109.6x P/E), a rival in the same software space. Additionally, its P/B ratio of 18.0x (2025 forecast) is reasonable relative to industry leaders like Xero (87.0x) and Technology One (57.3x).

Investment Thesis: A Buy on Dips, with Upside to $25+

OCL's valuation may appear stretched at first glance, but its strong cash flow, high gross margins, and accelerating EPS growth justify its premium. The stock's intrinsic value of $10.22 (per DCF models) is likely outdated, as it doesn't fully account for FY2024's outperformance or the 2025 product launches.

Recommendation:
- Buy on dips below $17: The stock's current price of $18.53 offers a margin of safety given its growth profile.
- Upside Target: A normalized P/E of 40x applied to FY2025 EPS estimates of $0.40+ implies a $16–$20 price target, with upside to $25 if margins recover as expected.

Risks to Consider

• Dependency on Government Contracts: Regulatory changes could impact demand.
• Competitor Pressure: Larger rivals like SAP or Oracle could encroach on OCL's niche markets.
• R&D Execution: Missed product launches could delay margin expansion.

Final Analysis

Objective Corporation's EPS growth engine, defensible moat in regulated industries, and well-positioned product pipeline make it a standout pick for growth investors in 2025. While valuations are elevated, the stock's fundamentals and peer-relative value justify its place in a high-growth portfolio. Investors should capitalize on near-term dips to lock in exposure to this software leader.

Disclosure: This analysis is for informational purposes only and does not constitute financial advice. Readers should conduct their own research or consult a licensed professional before making investment decisions.