Company Overview: Founded in 1996, Appen Limited (ASX: APX) is involved in developing high-grade human automated datasets for AI and machine learning (ML). The company reports under two segments, namely (1) Relevance and (2) Speech & Image (S&I). The company serves technology, financial services, automotive, government, healthcare, and retails industries.

APX Details

Synergies from Acquisitions & Higher Investments Aid APX: Appen Limited (ASX: APX) is engaged in offering data solutions and services for machine learning and artificial intelligence applications for worldwide technology companies, auto manufacturers, and government agencies. The company entered FY21 on a positive note, with new sales projects, decent top-line growth, and entry to China market. The company remains on track to assist its key customers and execute its growth strategy, along with enhancing shareholders’ value. In 2020, the company yielded 136 new customers across a variety of sectors and data types, thanks to its higher investments in sales and marketing strategies. The increase in customer base aids the company to penetrate more into the market and lays a robust foundation for growth in the days ahead.

In FY20, APX grew the number of projects by 34% across its top five customers, thus aiding new product developments. In 2020, The company completed the acquisition of Figure Eight and unveiled the latest Appen brand that builds on the brand equity in both businesses, aiding customer and project growth. Continued investments in AI-enabled annotation, are enhancing the company’s overall productivity and giving it a competitive edge over its peers. In 2HFY20, APX’s platform offered a trail to valuable committed revenue, which accounted for ~31% of the company’s total revenue, as compared to only 12% in 1HFY20.

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. In FY20, revenues from the Relevance segment remained strong and depicted an increase of 15% year over year. The ongoing demand of customers for high-quality annotated data to build and maintain the performance of their search e-commerce applications drove the relevance revenues. Revenues from Speech and Image segment were, however, down ~10% year over year, due to project delays led by the coronavirus outbreak. On a positive note, the addition of new customers and projects, growth in China, higher committed revenue are expected to augment the company’s overall market position. As at 1 February 2021, APX’s Annual Contract Value (ACV) increased massively to US$124.4 million as compared to US$25 million reported in 2HFY19.

Annual Contracted Value Highlights; Analysis by Kalkine Group  

Sneak-Peek at FY20’s Key Results: In FY20, the company’s revenues increased by 12% year over year and came in at $599.9 million, primarily due to an increase in existing and new Relevance projects with existing customers. Statutory EBITDA went up 23% on pcp, whereas underlying EBITDA depicted a rise of 8% year over year. Statutory NPAT increased by 21% year over year to $50.5 million in FY20. However, underlying NPAT during the period came in at $64.4 million, slightly down by 1% year over, owing to higher investments and higher amortisation. 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. Notably, in 2020, the company declared full-year dividend of 10.0 cents per share, depicting a rise of 11% from the prior corresponding period. Operating expenses as a percent of revenues stood at 22.6% in FY20, up from 20.9% reported in FY19, owing to incremental investment in sales and marketing and China.

Key Metrics, Balance Sheet & Liquidity Position: The company exited the period with a cash balance of ~$78 million after repayment of the debt, higher investments in sales and marketing and China, and payments of tax and dividend. The company’s balance sheet continues to grow, with net assets increasing to $485.87 million as at 31 December 2020. Net cash flow from operating activities stood at $93 million, up by 39% on pcp.

For FY20, the company’s cash cycle days stood at 45.6 days, lower than the industry median cash cycle days of 78.2 days. The current ratio of the company stood at 2.58x in FY20, higher than the year-ago figure of 1.57x. The company reported a net margin of 8.4% in FY20, higher than the year-ago figure of 7.8%. ROE of the company stood at 10.4%, against the industry median figure of 7.3%. In FY20, the company’s debt to equity ratio stood at 0.05x, lower than the industry median figure of 0.42x.

Growth and Liquidity Profile; Analysis by Kalkine Group

Key Updates:

1. On 4 June 2021, the company informed the market that Mark Brayan, CEO and Managing Director of the company has sold 109,430 APX shares. Mark sold its shares in order to fulfil the tax requirements occurring from the vesting of 173,153 performance rights in March this year. Notably, both directly and indirectly, Mark continues to hold 482,032 shares in the company.
2. In another update, the company announced that The Capital Group Companies, Inc. (“CGC”), and its related bodies corporate has become a substantial holder of the company on 26 May 2021, with voting rights of 5.03%

Top 10 Shareholders: The top 10 shareholders together form around 25.03% of the total shareholdings, while the top 4 constitutes the maximum holding. Vonwiller (Christopher) is the entity, holding maximum shares in the company at 7.36%. The Vanguard Group, Inc. is the second-largest shareholder, with a holding of 4.86%, as also highlighted in the chart below: 

Top 10 Shareholders, Analysis by Kalkine Group  

Risk Analysis: In FY20, revenue from Speech and Image went down 10% year over year, primarily impacted by robust AUD in 2HFY20 and changes in the company’s key customers’ activities and preferences, as a result of the COVID-19 virus outbreak. Further, rising expenses, foreign currency fluctuation risk, cyber-security risk, stiff competition from peers, stringent regulation, and loss of key customers add to the woes.

Outlook: APX’s recent product-led strategy is expected to bolster its foothold in key new markets, drive growth, and provide high-quality training data. The company has also developed a robust product suite of the market-leading platforms via recent acquisitions and engineering investment. This, in turn, is expected to further augment its competitive position in the market.  The company continues to invest in technology to aid its major programs and recommence in 2021. For FY21, the company expects underlying EBITDA to be in the range of A$120 million - A$130 million at constant currency, depicting a rise of 18% - 28% on the FY20 figure. Moving forward, for FY22, the company expects gross cost savings (before reinvestment) to be US$15 million.

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: Over the last three months, the stock went down by ~17.7%. The stock made a 52-week low and high of $10.65 and $43.66, respectively. 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 discount to its peer average, considering the decline in Speech and Image revenues in FY20, forex headwinds, change in customer preferences, and loss of any key customers due to COVID-19 led uncertainties. We have taken peers like Altium Ltd (ASX: ALU), TechnologyOne Ltd (ASX: TNE), to name a few. Considering the above factors, decent FY20 financial performance, acquisition synergies, decent liquidity postion, robust customer base, current trading level, and encouraging long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $14.31, as on June 25, 2021, 7.35 AM (GMT+10), Sydney, Eastern Australia.

APX 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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