Our target price of A$3.25 is derived by rolling forward our blended valuation at the cost of equity, less the next 12 months of dividends to be paid and converted to AUD using an exchange rate of $0.57.

Our blended valuation is the average of: 1) our DCF valuation of €1.55; and 2) our relative valuation of €1.80.

Our DCF valuation is derived using a beta of 0.9 and a WACC of 9.4%. We use a risk-free rate of 3.0% and a terminal growth rate of 4%.

Our relative valuation is derived by applying a ~6x multiple to FY26e Software revenue and ~1x multiple to Services revenue. The ~6x multiple to Software revenue represents a -40% discount to vertical software peers, while the ~1x multiple to Services revenue represents a -50% discount to global IT services peers. The discount to Software peers reflects lower FCF margin, while the discount to IT Services peers reflects exposure to a single end market for the Services business.

We see the following downside risks to achieving our valuation and target price: i) weak economic conditions resulting in weaker-than-expected demand for Fineos' software and services; ii) need for further capital given Fineos is currently burning cash; iii) delays to product/project delivery; iv) increase in competition; v) new products (eg, Policy & Billing) failing to deliver expected growth; and vi) inability to successfully expand its presence in Europe and APAC.

We see the following upside risks to our valuation and target price: i) higher-than-expected sales from Absence Management in North America; ii) greater-than-expected traction of new products/modules as a result of successful deployments to existing clients; iii) faster-than-expected expansion into Europe and APAC markets; and iv) further M&A.