New support is coming for a small group of ASX-listed technology...

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    New support is coming for a small group of ASX-listed technology stocks, thanks to the government’s introduction of $1 billion worth of tax deductions aimed at SMEs.
    The deductions will help encourage businesses generating less than $50 million a year to adopt portable payment devices, cybersecurity systems and subscriptions to cloud-based services. This in turn is set to benefit companies such as Xero, Elmo Software and Whispir.

    RBC Capital Markets head of Australian investment research Garry Sherriff said for every dollar small businesses spent on applicable digital technologies, they would get $1.20 back.

    “It’s certainly an incentive if you’re considering a financial management software package, which is positive for Xero and Elmo Software,” he said.

    “The federal government is offering a material incentive to SMEs to purchase this software to digitise their business.”


    Mr Sherriff said the most obvious beneficiaries were companies such as Xero and Elmo, which provide cloud-based subscription software and have a large exposure to the SME segment.

    The benefit is also unlikely to be short-term, thanks to the sticky nature of their products.

    “Even though the package announced by the government is from now until the end of FY23, we think it will be enduring for some of the tech players like Xero and Elmo Software because it’s unlikely SMEs are going to switch back to non-digital practices after the incentive ends,” Mr Sherriff said.

    “[They] are highly unlikely to go back to manual processes or paper and pencil to run their businesses.”

    Communications SaaS stock Whispir and aerial imaging technology company Nearmap were also pegged as potential winners.
    Providers of software to education institutions Readytech and Keypath were also tipped get a boost from deductions on offer to SMEs investing in digital skills training for employees, as well as the $600 million in fresh spending on cyber defence capabilities and re-allocation of billions of dollars in the existing defence budget to cyber, which would require more people to undertake training courses.

    Other secondary beneficiaries are expected to be NextDC and Macquarie Telecom. Both companies provide the underlying data centre infrastructure needed as digital technologies boom, and Macquarie also provides cloud and cybersecurity services to government.

    Wilsons’ Ross Barrows said extra expenditure on cloud and cybersecurity across business and government would in turn drive more deployments at data centre operators.


    “NextDC is a second derivative, or second order, beneficiary from the potential incremental spend in cyber and cloud. Technology has to be housed or hosted somewhere, and NextDC builds, owns and operate data centres in which that technology can be hosted,” he said.

    Another likely beneficiary, Mr Barrows said, was TechnologyOne, which counts the government as its largest customer.
    Mr Sherriff tipped that the ASX would also benefit from the boost to employee share schemes, which will help tech companies retain talent, grow quicker, and get to a position where they could list more quickly.

    “This will support the future ASX tech IPO pipeline.”

    The fresh tailwind for the stocks comes amid a sector-wide sell off, triggered largely by the expectation of interest rates rising.
    In the last month, ASX-listed tech stocks have rebounded somewhat, following their NASDAQ counterparts higher. Investors in the US gained comfort on the fundamentals of some companies and the ongoing strength of the economy, despite the US Federal Reserve raising rates to ease inflation by making borrowing costs more expensive.


    The S&P/ASX All Tech index increased 3 per cent in March, led by gains from companies such as WiseTech, Whispir and Nearmap.

    “I think there’s still a fair bit of volatility ahead for ASX technology names for the next three to six months,” Mr Sherriff said.

    “I know there are expectations of interest rates rising, but it’s one thing to expect them and say they’re priced in, but it’s another to see it come into practice.

    “I’m not so sure we’ve hit our lows yet in the tech space, in my view.

    Mr Barrows said there was likely to be ongoing short-term pressure on tech stock multiples.

    “A rising rate environment will continue to pressure tech stock multiples, but the increased certainty from the visibility into interest rate rises should mitigate some of that pressure over time.”
 
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