Company Overview: Headquartered in San Diego, California, Altium Limited (ASX: ALU) is engaged in developing and selling computer software for the 3D design of electronic products and embedded systems. The company mainly has two reportable segments, namely (1) Boards and Systems, and (2) Nexar. The company was listed on ASX in 1999.

ALU Details

ALU Rides on Decent Liquidity & Encouraging Outlook: The company delivered a robust performance in 1HFY22, thanks to the impetus in ALU’s core PCB business, positive response to Altium 365 from its key customers, and tailwinds from the global electronic parts shortage. 

Limelight on 1HFY22 Results:

• Robust Top Line Performance: During the period, the company reported revenues of US$102 million, depicting an increase of 28% year over year. ALU witnessed strong ARR growth of 43% on pcp in 1HFY22, with recurring revenue growing to 74% of total revenue compared with 65% in 1HFY21. The positive results were mainly due to growth in PCB business (up 16% on pcp), Octopart outperformance, transition in business model and strong adoption of Altium 365. Notably, Altium 365 accounted for ~19,743 monthly active users in 1HFY22, up 54% since August 2021 and 7,734 monthly active accounts, up 29% since August 2021.
• Impressive Bottom-Line Growth: In 1HFY22, the company reported an underlying EBITDA margin of 34.1%, which was 11% higher compared to 1HFY21. Profit after tax stood at US$22.87 million, up 38% on a year over year basis. Earnings per share for the period increased a whopping 37% to US 17.41 cents, reflecting strong revenue growth, cost-control measures, and investment in the business.
• Liquidity Position: The company has a strong balance sheet and remains well-financed, thus delivering flexibility to sustain a growing business. Operating cash flow in 1HFY22, skyrocketed ~78% to US$33.3 million, owing to higher cash receipts from customers (up 19.1% YoY) and the decrease in net cash taxes paid. The company exited 1HFY22 with a cash balance of US$195 million, as compared to US$191. 5 million as of June 30, 2021. The company declared a fully franked interim dividend of AU 21 cents per share in 1HFY22, indicating an increase of ~11% on a pcp basis.

The below picture depicts robust growth in ALU’s operating segments:

Segmental Highlight; Analysis by Kalkine Group

Key Metrics: For 1HFY22, the company reported a gross margin of 98.2%, higher than the year-ago figure of 97.5%. In 1HFY22, the company recorded a current ratio of 2.84x compared to the 1HFY21 figure of 2.13x.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 39.10% of the total shareholdings, while the top 4 constitute the maximum holding. Mirkazemi (Aram) held the maximum number of shares with a percentage holding of 7.24%, followed by Pinnacle Investment Management Group Ltd holding 7.16%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company’s financial performance might get impacted by the change in customer preference and supplier concentration risk. Further, industry players are encountering margin pressure owing to high COVID-related costs. The company is mainly present in the technology segment. Thus, any technology failure may impact the financials of the company. In addition, the company requires regulatory approvals to conduct its business smoothly. Therefore, any delay in regulatory approvals may affect the company's business.

Outlook: The company is looking to become a dominant PCB design software tools provider. ALU remains on track to benefit from a better-than-expected business model transition and is well-positioned to leverage on post-pandemic market prospects. ALU is committed to achieving targets of US$500 million in revenue, 100,000 subscribers, and a target of 95% recurring revenue (ex-China and developing countries) by FY25/26. The company has upgraded its revenue outlook for FY22 and now expects it to be in the high-end of the guided range. As the company plans to scale up its leadership recruitment, margins for FY22 are likely to be at the low end of the guided spectrum.

Future View; Analysis by Kalkine Group  

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~10.84% in the past six-months. Currently, the stock is trading below the average of its 52-week high and low levels of $45.30 and $23.66, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers, considering the stiff competition, COVID-19 led uncertainties, loss of key customers, technology disruptions, etc. For the purpose of valuation, peers such as WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), Xero Ltd (ASX: XRO), and others have been considered. Considering decent liquidity position, rise in top-line and bottom-line, positive outlook, robust customer base, current trading levels, and indicative upside in the valuation, we recommend a ‘Buy’ rating on the stock at the closing market price of $32.87, up by ~2.558% as on 29 April 2022. 

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

ALU Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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