Altium Limited

ALU Details

Decent Growth in Unaudited Revenue and Sales: Altium Limited (ASX: ALU) is engaged in the development and sales of computer software for the design of electronic products. The market capitalisation of the company stood at ~$4.39 Bn as on 14^th July 2020. Recently, the company reported its unaudited sales and revenue for the full year ended 30 June 2020. During the year, the company managed to achieve revenue growth of 10% to US$189 million with solid performances in core business units and key regions despite the challenging COVID-19 environment. The company experienced record growth of 17% in the subscription base to well over 50,000 subscribers with a robust increase of 14% in new Altium Designer seats sold.

From 1^st May 2020, the company accelerated the roll-out of its new cloud platform Altium 365 to help engineers to work from anywhere and connect with anyone. In the month of May 2020, the company launched online selling to expand reach and to grow sales capacity to support its climb to 100,000 subscribers by 2025.

Unaudited Sales and Revenue (Source: Company Reports)

What to Expect: The company is in a decent position to generate further adoption of its new cloud platform Altium 365. ALU added that Altium 365 is moving its subscription business from being maintenance driven to capability driven. The company has scheduled to release its fiscal 2020 results on 17^th August 2020.

Key Risks: The company is mainly exposed to a variety of financial risks such as market risk (including foreign currency risk, price risk and interest rate risk) and credit risk. Foreign currency risk arises from the fluctuation in the foreign exchange rate as the company undertakes certain transactions denominated in foreign currency. Interest rate risk is influenced by the assets and liabilities bearing variable interest rates as the Group intends to hold fixed-rate assets and liabilities to maturity. The group’s business is also sensitive to credit risk, which arises from the default of counterparty on their contractual obligations. This may lead to financial loss to the Group.

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Net margin of the company stood at 24.7% in 1H FY20 as compared to the industry median of 14.3%. This implies that the company has decent capabilities to convert its topline into the bottom line against the peer group. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as TechnologyOne Ltd (ASX: TNE), WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), etc. Thus, considering the decent growth in sales and revenue, growth in subscribers and improvement in net margins, we give a “Hold” recommendation on the stock at the current market price of $32.290 per share, down by 3.612% on 14^th July 2020.

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

OZ Minerals Limited

OZL Details

Signing of New Five-Year Agreement: OZ Minerals Limited (ASX: OZL) is a mining company focused on copper. The market capitalisation of the company stood at ~$4.02 Bn as on 14^th July 2020. Recently, the company has inked a new five-year agreement with specialist underground mining contractor, Byrnecut Australia, to provide its underground mining services at the Prominent Hill mine. The company has also announced the acquisition of Cassini Resources through a Scheme of Arrangement. Notably, Cassini Resources is likely to undertake an inter-conditional demerger of its Yarawindah Brook and Mount Squires assets into a new company, Caspin Resources Limited. Cassini shareholders will receive consideration with an implied value of $0.16 per share. This acquisition will result in 100% ownership of the West Musgrave Project by OZL. During Q1, the company reported production of 15,580 tonnes of copper and 49,049 ounces of gold.

Gold and Copper Production (Source: Company Reports)

Long-Term Fundamentals of Copper: The company believes that long-term fundamentals of copper are highly attractive. The company is identifying various opportunities to accelerate growth prospects. The company will release its results for Q2 FY20 and H1FY20 on 22^nd July 2020 and 19^th August 2020, respectively.

Key Risks: The company’s business is exposed to physical and non-physical climate risk. Physical climate risk arises from the increased severity of extreme weather events and chronic risks due to long-term changes in climate patterns. Non-physical climate risks are influenced by policy, regulatory, legal, technology, financial and market responses to the challenges posed by climate change and the transition to a lower-carbon economy. In addition, OZL’s business is also sensitive to macroeconomic and geopolitical risk, as the company operates in Australia and Brazil and has exploration activities in multiple countries. 

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: As of 31^st March 2020, the unaudited closing cash and debt balance of the company stood at $61 million and $150 million, respectively. Debt to equity multiple of the company stood at 0.06x in FY19 as compared to the industry median of 0.11x. We have valued the stock using a P/CF multiple based illustrative relative valuation method and arrived at a target price of high single-digit upside (in percentage terms). For the purpose, we have taken peers such as Mineral Resources Ltd (ASX: MIN), Iluka Resources Ltd (ASX: ILU), Lynas Corporation Ltd (ASX: LYC), etc. Thus, considering the signing of a new five-year agreement, acquisition of Cassini Resources, and deleveraged balance sheet, we give a “Hold” recommendation on the stock at the current market price of $12.080 per share, down by 2.581% on 14^th July 2020.

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

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