Xero Limited

Profit booking: Xero Limited (ASX: XRO) is engaged into the operation of providing innovative products, services and solutions to small businesses. In its half yearly (H1FY19 ended on September 2018) result, the company reported increase in revenue by 37% pcp to NZ$256.5 Mn. Its annualised monthly recurring revenue (AMRR) increased by 40% to NZ$589.1 Mn.It reported an increase in average revenue per user (ARPU) by 6% pcp to NZ$31.1. It added 193,000 net subscribersduring the period taking the total subscribers to 1.579 Mn at September 30, 2018. Its net loss increased to NZ$28.6 Mn in the half year from a loss of NZ$19.6 Mn in H1FY18.

The company highlighted the acquisition of leading data capture solution Hubdoc, a strategic partnership with US payroll provider Gusto. XRO successfully secured US$300 Mn (NZ$451 Mn) in capital via a convertible note offering, which will be used to enhance and extend its small business platform and ecosystem capabilities through complementary and targeted acquisitions and investments.


H1FY19 P&L Statement (Source: Company Reports)

What To Expect: The company aims to focus on its global small business platform. Its cash-outflow in FY19 is expected to reduce as compared to cash-outflow in FY18.Excluding the capital outlays for M&A, the company is managing the business to cash flow break-even within the current cash balance, without drawing on the debt facility or net proceeds from the convertible notes which were issued in the month of October 2018. In the future, following the cash flow break even, surplus cash flow will be reinvested to drive long term shareholder value.

Stock Recommendation: The stock of XRO is currently trading close to its 52 weeks high price, and the possibility of correction might be expected. Its gross margin, EBITDA margin, and net margin for H1FY19 stands at 82.8%, 14.1%, and -11.1%, lower than the industry median of 86.4%, 28.5%, and 15.8% respectively. On valuation front, its P/B multiple for TTM stands at 24.42x higher than the peer median of 2.5x, indicating overvalued position of the stock at the current juncture.

Hence, considering the aforesaid facts and current trading level, we recommend a “Sell” rating on the stock at the current market price of $55.030 per share (up 1.065% on May 1, 2019), and we suggest to investors that they can book the profit at the current level.
 

Appen Limited

Overvalued at the current level: Appen Limited (ASX: APX) provides data solutions and services for machine learning and artificial intelligence applications for global technology companies, auto-manufacturers, and government agencies. The company recently published annual report for the year 2018, wherein it reported an increase in total revenue by 119% to $364.3 Mn in FY18 as compared to FY17, majorly driven by growth in accelerating AI market and the strong demand for high quality training data.

The language resources team recorded a 27% increase in revenue, and the content relevance division delivered a 148% increase in revenue over the prior year. The company’s underlying EBITDA increased by 153% to $71.3 Mn in the same period. It was driven by the Leapforce acquisition and significant organic revenue increase and operating cost efficiency through scalability of operations.The company paid interim dividend out of the profits reserve for the year ended 31 December 2018 of 4.0 cents per ordinary share.

On 25 February 2019, the Board of Directors declared a final dividend for the year ended 31 December 2018 of 4.0 cents per share, partially franked.


FY18 P&L Statement (Source: Company Reports)

What To Expect: The company intends to invest in the new technology to reduce costs, improve margins and sharpen responsiveness to evolving customer requirements.It aims to broaden its customer base and establish its presence in China to participate in the dramatic growth of artificial intelligence and machine learning in that country. The company anticipates attractive opportunities in the medium term for machine learning applications in financial services and industrial sector.

Stock Recommendation: Appen’s share generated positive YTD return of 97.81%. It is trading close to its 52 weeks high, leading to a possibility for correction. Its gross margin, EBITDA margin, and net margin for FY18 stands at 37.3%, 19.1%, and 11.5% lower than the industry median of 70.3%, 27%, and 11.6% respectively.

On the valuation front, its P/E multiple for TTM stands at 64.510x higher than the peer median of 7.46x, indicating the overvalued position at the current juncture. Hence, considering the aforesaid facts and current trading level, we recommend a “Sell” rating on the stock at the current market price of $25.740 (up 1.659% on May 1, 2019).

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