Company Overview: Nearmap Limited (ASX: NEA), along with its subsidiaries, is an innovative location intelligence company capturing a rich data set about the real world, providing high value insights to a diverse range of business and government organizations. It captures wide-scale urban areas in Australia, New Zealand, the United States of America, and Canada, making fresh content instantly available in the cloud via web app or API integration. The company was found in Australia in 2007 and employs nearly 300 people globally.


NEA Details

Continued Growth in Customer Retention: Nearmap Limited (ASX: NEA) provides geospatial map technology for business, enterprises, and government customers. It is also engaged in online aerial photo mapping via its 100% owned subsidiaries, Nearmap Australia Pty Ltd, Nearmap US, Inc. and Nearmap Remote Sensing US, Inc. As on 30 June 2020, the market capitalization of the company stood at ~$988.25 million. During FY19, the company accelerated progress in the North American business and reinforced market leading position in Australia & New Zealand. Continued improvement in customer retention has firmly established the market leading position of the company. FY19 demonstrated execution on a number of strategic objectives. First and foremost is the investment in research and technology, which delivered several significant product milestones throughout the year. During the year, the company reported an increase of 47% in total revenue to $79.4 million, underpinned by continued customer retention and growth in the customer base. Growth in revenue reflects the growth in the annualized contract value of the group’s subscription portfolio, with the Australian and New Zealand portfolio growing 19% to $57.9 million. In the same time span, the company reported a strong debt-free balance sheet with a closing cash balance of $75.9 million.

NEA is uniquely positioned for a global opportunity with a leading camera and processing technology, highly scalable business model and a rich library for content and expanding product suite. During 1H20, the company delivered a range of product features and enhanced productivity with a diverse customer base. The company saw strong growth across the mid-market enterprise subscriptions and saw an increasing return on investment.

The company has a proven and unique business model and is on track for continued growth trajectory in the foreseeable future, subject to a stable macro-economic environment. It is seeking new opportunities to build scale and to broaden its customer base, sales and marketing capability, product offering and technological advantage. It is re-focusing on driving sales leadership in the ANZ region and continues to outgrow the competition. 


FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Nearmap Limited. Norgard (Ross Stewart) is the largest shareholder in the company, with a percentage holding of 6.05%.
   

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Stability in Balance Sheet and Well Management of Costs: Over the span of two years from 1H18 to 1H20, EBITDA margin of the company witnessed an increase and stood at 7.7%, up from 5.5% in 1H18. This indicates that the company is well managing its direct costs and is capable of converting its topline into the bottom-line. During 1H20, current ratio of the company stood at 1.09x as compared to 0.72x in 2H18. This indicates that the company retains sufficient liquidity to pay off its current liabilities using its current assets. In the same time span, Assets/Equity Ratio of the company was 2.37x, down from 2.84x in 2H18. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Refinitiv, Thomson Reuters)

Half-Year Results: NEA has a powerful and compelling business model. During 1H20, ACV portfolio of the company grew by 23% on the prior year and stood at $96.6 million, and statutory revenue of the company went up by 31% to $46.3 million. In the same time span, pre-capitalization gross margin of the company was 68% and subscription churn increased to 11.5%. During the half-year, the company increased its headcount from 207 in 1H19 to 327 in 1H20 to build a strong foundation for scalable growth. In the same time span, the company reported EBITDA of $3.2 million and an EBITDA margin of 7%. During 1H20, the company reported a net cash outflow of $26.3 million and a cash balance of $49.6 million. The company focused on optimization and driving operating leverage with minimal operating and capital cost growth. NEA has a large and growing aerial imagery market estimated to be around US$10.1 billion in 2020. The company’s unique business model has the potential to scale to multiple geographies around the world, particularly developed economies with an advanced level of adoption of geospatial technology.


Growth in Subscriptions and ARPS (Source: Company Reports)

Commercial launch of AI: The company has launched Nearmap AI, to be available via self-service export and offline channels in Australia and the US. NEA has recently reported that its ACV portfolio is above $102 million. While the trading conditions in the world have become more challenging with the outbreak of COVID-19, the company has performed well and continued to grow its portfolio month-on-month across its key industry segments. NEA has implemented cash management initiatives and is on track to be cash flow break-even by the end of FY20. Continued strong usage metrics during this unprecedented time reflects the company’s engagement with its customers and further emphasis on the compelling advantages of its unique business model. 

Key Risks: With the onset of COVID-19, the company has witnessed some impact on its velocity of the sales cycle as a small number of customers delay their decisions to upsell or acquire. However, with the growing sales pipeline, the fundamentals of the company remain intact. The company is highly exposed to data security risks. It is important for businesses to be well-informed of any new or emerging trends. The current global scenario also exposes the business to supply chain risks, which could impact the financial performance. NEA is also exposed to risks arising from financial instruments, mainly market risk, particularly in relation to foreign currencies and credit risk.

Future Expectations and Growth Opportunities: NEA is executing on its growth initiatives and is on track for significant scale-up and offshore labelling capacity. The company’s expected first enterprise sales of roof geometry content in North America, in 1H20, represents a growing opportunity in FY21. The company assesses the market opportunity to be in the range of US$100 million to US$200 million per year. Continued development of next generation camera systems will further accentuate the technology leadership position and competitive advantage. NEA is expecting a lower rate of cost growth with an increased focus on driving returns from the investments. 

As the economic conditions return to normal, NEA is confident in its long-term growth aspirations. The company has provided guidance for FY20 wherein it expects its cash balance in the ambit of $32 million to $35 million. Based on customer demand, Nearmap Limited has invested significantly in its core technologies and customer propositions. Nearmap continues to enhance its market leading position to penetrate more deeply into the large and expanding intelligence market. The company has re-affirmed its position as a global leader and is looking forward to bringing new and innovative products to grow its customer base.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation Approach (Illustrative)

EV/Sales Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The group is seeking new opportunities to build scale and to broaden its customer base, sales and marketing capability, product offering and technological advantage. Despite the global economic slowdown, the company witnessed growth across customer segments, reflecting the resilience of the portfolio. As per ASX, the stock of NEA gave a significant return of ~102.79% in the past three months and is trading slightly below the average level of its 52-weeks’ trading range of $0.830 and $3.950. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and have arrived at a target price offering an upside of lower double-digit (in percentage terms). For the said purposes, we have considered TechnologyOne Ltd (ASX: TNE), FINEOS Corporation Holdings PLC (ASX: FCL) and Altium Ltd (ASX: ALU) as peers. Considering the current trading levels, attractive returns in the past three months, the resilience of the business amidst the COVID-19 pandemic, and positive long-term outlook, we recommend a “Buy” rating on the stock at the current market price of $2.250, up 3.211% on 30 June 2020.


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

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