Company Overview: Appen Limited (ASX: APX) develops high-grade human automated datasets for Machine Learning (ML) and Artificial Intelligence (AI). The company’s expertise includes more than 1 million skilled contractors, in over 70,000 locations and 170 countries. The company serves technology, financial services, automotive, government, healthcare, and retails industries.

APX Details

New Product Launches, Acquisition Synergies & Growth Strategies: APX rides on the ongoing demand of customers for high-quality annotated data and enhanced focus of global technology customers on new AI products and applications. The company remains on track to invest higher in product development, which, in turn, supports customer growth in New Markets and lays a foundation for further growth.

1HFY21 Key Findings: 

• Customer Growth: The company has a growing number of customer relationships. In 1HFY21, the company yielded 74 new customers across various sectors and data types. Notably, the company had more than 320 active customers across diverse industries, and geographies in 1HFY21.
• Rise in Projects: In 1HFY21, the company started working with Global customers on 100 new projects, reflecting its expertise and evolving capabilities. Out of the new projects, 97 were not ad-related, reflecting Global customers’ product diversification.
• Buyout Synergies: Recently, the company completed the acquisition of Quadrant, a leader in Point-of-Interest (POI) data and mobile location, to expand its range of data capabilities, product offering, and access growth avenues in the global location intelligence market. Appen plans to invest further in Quadrant’s market and product expansion in 2021 and 2022.
• Growth in China Market: Revenues in China stood at US$7.5 million in 1HFY21, which were 5.8x of 1HFY20, thus expanding the company’s market share and delivering a robust base for future growth.
• Enhancing Shareholder’s Value: The company has a decent track record of rewarding shareholders through dividends. Supported by its decent liquidity position, APX declared an interim dividend (50% franked) of AUD 0.045.
• Revenue Decline: APX reported a decline in total revenues to US$196.6mn in 1HFY21, down by 2% on pcp, due to the impact on Global Services revenue as the customers plan to spend on new and non-ad related projects to boost their revenue.
• Expansion in New Markets: Revenues from New Markets went up by 31.5%, owing to product led growth and a higher customer base.
• Increase in ACV: APX’s Annual Contract Value (ACV) increased to US$119.6 million in 1HFY21, compared to US$103 million reported in 1HFY20, underpinned by the expansion of enterprise-wide platform agreement with an existing Global customer.
• Healthy Balance Sheet: The company exited the period with a cash balance of ~US$66 million with nil debt as on 30 June 2021. Cash conversion stood at 101% of underlying EBITDA.

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. The below picture depicts a rise in APX ACV’s from 2HFY19 to 1HFY21.

Annual Contracted Value Highlights; Analysis by Kalkine Group  

Key Metrics: In 1HFY21, the company recorded a current ratio of 2.86x compared to the 1HFY20 figure of 2.58x. The debt-to-equity ratio for the period stood at 0.05x, lower than the industry median of 0.60x.

Profitability and Leverage; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 23.98% 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:

• Loss of key Customers: The company’s financial performance might get impacted by caution in buying behaviour. Thus, retaining robust and long-term customer relationships is a tough task.
• COVID-19 Led Uncertainties: The company is exposed to the prevailing global uncertainties related to COVID-19 and other geopolitical tensions.
• Integration Risk: APX is acquiring many companies, which results in some integration risk.
• The company is also exposed to foreign currency fluctuation risks and stiff competition from peers, who develops similar product lines and services.

Outlook: The company remains on track to invest higher in new markets, thus opening avenues for revenue growth, more customers, and higher ACV. Further, an AI-enabled product suite is likely to aid APX to bolster its position in new markets and deliver automation and scalability. APX revised its FY21 underlying EBITDA guidance from US$83 - $90mn to US$81 - $88mn. APX forecasts a more robust order book and revenue skewed towards 2HFY21 based on its customers’ delivery schedule. The company expects FY21 Global Services revenue growth to be in the mid to high single digits. At the same time, the New Markets are expected to grow at circa 25%. Gross margins are anticipated to increase in 2HFY21, consistent with FY20, owing to a favourable customer and project mix.

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 ~44.20% in the past six months. Currently, the stock is trading close to its 52-week low level of A$9.10. The stock has been valued using 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’ average P/E, considering lower revenue, NPAT, the business impact on the Global Services revenue and its customers, risk of skewed project deliveries, etc. For the purpose of valuation, peers such as TechnologyOne Ltd (ASX: TNE), Data#3 Limited (ASX: DTL), Iress Ltd (ASX: IRE) and others have been considered. Considering healthy balance sheet, synergies from buyout, growth in ACV and New Markets business, new non-ad related projects, order pipeline for FY22, current trading levels, and valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $9.65, as on 24 September 2021, 03:50 PM (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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