Company Overview: Appen Limited (ASX: APX) is a developer of high-grade human automated datasets for artificial intelligence and machine learning (ML). It has two reporting segments, namely Relevance and Speech & Image (S&I). The company serves technology, financial services, automotive, government, healthcare, and retails industries. The company has more than 20 years of experience in accumulating and enhancing a broad range of data types, including speech, text, image, and video. It has expertise in ~235 languages and entrance to a global group of more than 1,000,000 experienced contractors.

APX Details

New Customer Win & Enhancing Shareholder’s Values Aids APX: Appen Limited (ASX: APX) is engaged in providing data solutions and services for machine learning and artificial intelligence applications for global technology companies, auto manufacturers and government agencies. The market capitalisation of the company as on 26 March 2021 stood at ~$2.16 billion. The company ended 2020 with a strong note, owing to committed revenue, new sales, new projects, and its entrance into the China market. Notably, revenues in China increased by 60% every quarter in FY20, thus expanding the company’s market share and delivering a robust base for future growth.

Despite the global challenges, the company remains on track to support its customers and achieve its growth strategy, along with enhancement of shareholder’s value. The company operates in a high growth market, and it expects firms to accelerate their AI needs in the post-crisis environment. This puts APX in an advantageous position to capture the market growth, given the track record and highly skilled staff it has got. Notably, in 2020, the company’s initiatives to make higher investments in sales and marketing yielded ~136 new customers across a variety of sectors and data types. APX also extended the number of projects by 34% across its top five customers, thus, encouraging many new product advancements.

Looking at the past performance over the period of FY15-FY20, the company reported a CAGR of 49% in total revenues, with continuous upward progress. Underlying EBITDA and underlying net profit after tax for the same time span increased at a CAGR of 51%, each, respectively. As depicted in the figure below, the company remains on track to enhance its shareholder’s value through dividends. Recently, the company has declared a final dividend of AUD 0.055, with an ex-date of 1 March 2021 and a payment date of 19 March 2021. Further, in 2020, the company declared full-year dividend of 10.0 cents per share, depicting a CAGR of 19% over the last 5 years.

The below trend has been strongly backed by continued growth delivered by ongoing demand for high-quality training data for AI, new customers’ addition, along with fundamental strength and relevance of APX’s solution offerings in an ever-growing market.

Key Trends (Source: Company Reports)

It is worth mentioning that the company completed the integration of Figure Eight in FY20 and unveiled a whole new Appen brand that builds on the brand equity in both businesses. Further, the integration aided the company to boost its customer base and project growth. This coupled with ongoing investment in AI-enabled annotation, is enhancing efficiency and further bolstering the company’s competitive position. The platform generated decent, committed revenue, which increased from 12% in the 1HFY20 and reached 31% of the company’s total revenue in 2HFY20.

FY20 Financial Highlights: During the period, the company reported revenues of $599.9 million, an increase of 12% from $536 million in FY19, owing to an increase in existing and new Relevance projects with existing customers. The company’s Annual Contract Value (ACV) rose substantially to US$124 million as at 1 February 2021 from US$25 million reported at 2019-end. It experienced a 23% rise in statutory EBITDA and 8% in underlying EBITDA during FY20. Statutory NPAT increased by 21% year over year to $50.5 million in FY20. Sales from Relevance segment reported an increase of 15% to $538.2 million in the same period.  Speech & Image segment revenues, however, declined 10% year over year and came in at $61.2 million.

FY20 Key Highlights (Source: Company Reports)

Healthy Balance Sheet and Decent Liquidity: The company has built a decent balance sheet position with net assets increasing to $485.87 million as at 31 December 2020. APX has cash and cash equivalents of $78.4 million at the end of FY20, which was after the full repayment of debt, growth investments and expanded dividend and tax payments. Total debt at the end of the period amounted to ~$25.2 million. The company’s cash conversion stands at 104% of underlying EBITDA. Net cash flow from operating activities increased to $93.57 million in FY20, up from $67.3 million in FY19. The company’s healthy balance sheet and skilled management team along with its long-term nature of customer relationships place APX for considerable long-term growth.

For FY20, the company reported a net margin of 8.4%, higher than the year-ago figure of 7.8%. ROE of the company stood at 10.4%, against the industry median figure of -2.5%. In FY20, the company’s debt to equity ratio stood at 0.05x, lower than the industry median figure of 0.49x.

Profitability and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 22.92% of the total shareholdings, while the Top 4 constitutes the maximum holding. Vonwiller (Christopher) is the entity, holding maximum shares in the company at 7.37%. The Vanguard Group, Inc. is the second-largest shareholder, with a holding of 5.01%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group  

Risk Analysis: The year 2020 was marked by key challenges, which impacted the company’s 2H result. APX’s B2B selling was negatively impacted by the COVID-19 induced shift to working from home. This, in turn, resulted in fewer customer wins in Q2 and Q3. However, the company bounced back in Q4FY20. In mid-2020, the covid-19 led uncertainties also lowered online advertising, affecting APX’s major customer base and reducing spending on advertising-linked AI programs. Further, stiff competition in the markets where APX operates and regulatory concerns may dampen financial performance. Further, foreign currency fluctuation risks and government restrictions add to the woes. Further, the company’s financial performance can be battered by increasing headcounts and personnel costs. This, in turn, may weigh on margin expansion, going forward. Also, rising expenses pose some risk.

Outlook: The company has a robust existing pipeline of new customers in markets and in new business lines such as shipping, education, and healthcare for FY21. Further, the company is involved in many new projects, which are in their nascent stages and expanding. The company expects these projects to aid its major programs and recommence in 2021. Further, APX expects advertising to rebound strongly in FY21. For FY21, the company expects underlying EBITDA to be in the range of $120 million- $130 million at constant currency, indicating a rise of 18% - 28% on FY20 underlying EBITDA.

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

Data Source: Refinitiv, Thomson Reuters, 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: Over the last three months, the stock went down by ~29.2% and went down 1.9% in the past one month. The stock made a 52-week low and high of $15.15 and $43.66, respectively. On the technical analysis front, the stock has a support level of ~$15.16 and a resistance level of ~$21.6. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at a slight premium to its peer median, considering its decent top-line performance, increase in customer base, enhancing shareholder’s value, decent cash position and encouraging outlook. We have taken peers like Altium Ltd (ASX: ALU), TechnologyOne Ltd (ASX: TNE), to name a few. Considering the above factors, robust customer base, increase in cash balance and operating cash flow, decent FY20 financial performance, increasing underlying EBITDA, current trading level, and positive long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $17.51, down by 0.285% on 26 March 2021.  

APX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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