Appen Limited

APX Details

Digging into 1HFY21 Results (for the period ended 30 June 2021): Appen Limited (ASX: APX) develops high-grade human automated datasets for Artificial Intelligence, and Machine Learning applications served to technology, financial services, healthcare, automotive, retail companies, and government bodies.

• Improvement in New Markets: During the period, APX saw a rise of 31.5% on pcp in New Markets, owing to the product-led growth, and robust performance in its China and Enterprise businesses.
• Rise in Customers: At the end of 30 June 2021, the company’s sales teams earned 74 new customers and had more than 320 active customers across diverse industries, and geographies.
• Growth in Global Product Revenues: Revenues from Global Product revenue went up by 15.2%, thanks to customers' higher adoption of products to enable their new AI investments.
• Higher Spending: The company invested ~10.8% of the revenue earned during 1HFY21 in product development to expand the market reach and new opportunities. Further, an investment of US$21.2 million in 1HFY21, depicts a higher focus on customer wins, scalability, repeatability, quality, and margin expansion.
• Cash Rich Company: The company’s cash balance stood at~US$66 million with nil debt as on 30 June 2021. The company reported cash conversion of ~101% of underlying EBITDA in 1HFY21.

APX’s Share in the China market (Analysis by Kalkine Group)

Risk Analysis: APX’s financial performance might get impacted by caution in buying behaviour. The company is also exposed to foreign currency fluctuation risks and stiff competition from peers, who develop similar product lines and services. 

Expect What?

APX remains well equipped to gain from the ongoing demand of customers for high-quality annotated data and enhanced focus of global technology customers on new AI products and applications. Increased investment in product development, will aid customer growth in New Markets and lay a robust foundation for APX’s further growth. The company has provided revised underlying EBITDA guidance to ~$81-$88 million, from US$83 - $90mn, due to planned investment in Quadrant. The company expects to report its FY21 results on 24 February 2022. 

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 ~33.6% in the past nine months. Currently, the stock is trading close to its 52-week low level of A$8.36. 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 some discount as compared to its peers, considering the impact on Global Services’ division, narrowed guidance for underlying EBITDA, integration risk, loss of key customers, 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. Taking into consideration the above-mentioned factors, cash-rich company, growth in ACV and New Markets business, robust order pipeline, current trading levels, indicative upside in the valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $10.915, as on 4 January 2022, 10:50 AM (GMT+10), Sydney, Eastern Australia.

APX Daily Technical Chart, Data Source: REFINITIV 

Nearmap Limited

NEA Details

Business Update: Nearmap Limited (ASX: NEA) is involved in the provisioning of geospatial map technology for enterprises, businesses, and government customers.

• In a recent update, the company informed the market that it anticipates the North America portfolio’s Annualised Contract Value (ACV) to surpass the ACV of its Australia and New Zealand portfolio for the first time. The expectation is expected to take place by the end of Q2FY22.
• Notably, in 1HFY22, NEA outperformed US$100 million in Group ACV and US$50 million of ACV in its North America portfolio.
• The company remains on track to invest in its strategic market. In doing so, NEA is taking necessary measures to double its US capture program coverage footprint in FY22 to ~80% of the population.

AGM Highlights:

• During the year ended 30 June 2021, the company recorded a substantial growth in ACV to $133.8 million, which surpassed the initial guidance of $120-$128 million. This was mainly generated by the growth in Incremental ACV from the North American portfolio.
• During the year, NEA’s statutory revenue soared by 17% to $113.4 million, and as a result, it reached the milestone of surpassing $100 million in revenue.
• NEA recorded progress in HyperCamera3, evident by the completion of designing and prototype system has been tested in flight.
  
  

Key Highlight, Analysis by Kalkine Group

Key Risks: The company’s business is exposed to cybersecurity risk, and risks pertaining to the shift in technology, which can change the way of doing business. Any severe movement in foreign exchange prices may lead to financial losses for the company.

Outlook: On a constant currency basis, the company expects ACV in the range of $150 million and $160 million for FY22. The company continues to perform well, and remain positive regarding its North American business, Australia, and New Zealand. Looking forward, the company would continue to target growth of 20-40% in ACV in the medium to long term and to maintain underlying retention above 90%.

Valuation Methodology: EV/Sales 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 NEA is trading below the average of its 52-week low and high levels of $1.37 and $2.79, respectively. The stock of NEA has been corrected by ~16.12% in the past six months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). Considering the COVID-19 disruptions, forex headwinds, negative net margin, the company can trade at a slight discount to its peers. For the purpose of valuation, peers such as Altium Ltd (ASX: ALU), TechnologyOne Ltd (ASX: TNE), LiveHire Ltd (ASX: LVH), and others have been considered. Considering the indicative upside in valuation, significant growth in ACV, decent balance sheet, positive outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.535, as on 4 January 2022, 10:50 AM (GMT+10), Sydney, Eastern Australia.

NEA 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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