Altium Limited

Decent Performance in 1HFY19:Altium Limited (ASX: ALU) is engaged in the development and sales of computer software for the design of electronic products. The company recently updated that Blackrock Group became a substantial shareholder of the group with the voting rights of 5.0%. The company also notified that it will release FY19 results on 19 August 2019.

1HFY19 Highlights: During the six months ended 31 December 2018, revenue amounted to US$78.1 million, up 24% on the prior corresponding period. Profits during the period expanded to record levels. Net profit after tax was reported at US$23.4 million, up 58% in the prior corresponding period. EBITDA margin stood at 36.3%, as compared to 30.0% in the prior corresponding period.

During the period, revenue in China reported a growth of 49%. Board and Systems revenue was reported at US$58.4 million, up 17% on the prior corresponding period. The company’s subscription pool witnessed a rise of 9% with 39,179 subscribers in 1HFY19. Octopart continued to deliver strong performance with 80% increase in revenue. Earnings per share during the period stood at 18.0 cents, up 57% on the prior corresponding period.


Key Financial Measures (Source: Company Reports)

Margin Analysis: During the first half, the company’s EBITDA margin was reported at 36.3%, as compared to 30.0% in 1HFY18. Net profit before tax margin for the period was reported at 33% against pcp margin of 26%.
 
Plans in Pipeline: The company is confident of achieving an FY2020 target of US$200 million revenue and EBITDA margin of 35% or better. Moreover, the company aims to grow Altium Designer subscriber base to 100,000 subscribers, before 2025. In addition, the company is targeting revenue amounting to $500 million in 2025. The company aims to pursue M&A and partnership opportunities to support its long-term objective of creating product design and realisation platform centered around electronics.
Stock Recommendation: The stock of the company generated returns of 77.52% over a period of 1 year and has a market capitalisation of ~$4.71 billion. Currently, the stock is priced close to its 52 weeks high level of $38.490. The company reported decent results in 1HFY19, depicted by respectable revenue growth, record EBITDA margin of 36.3%, and a decent increase in subscriber base. Considering the price performance in the last 1-year, 1H19 results, growth plans, etc., we are of the view that most of the positive factors are already discounted at the current level. Hence, we give an “Expensive” recommendation on the stock at the current market price of $35.700, down 1.163% on 02 August 2019.
 

Xero Limited

Positive Gross Margin Across All Segments: Xero Limited (ASX: XRO) is engaged in the provision of an online business platform to small businesses and their advisors. The company recently released an announcement regarding the issue of 24,101 fully paid ordinary shares issued on vesting of restricted stock units.

FY19 Financial Highlights: During the year, the company reported operating revenue amounting to $552.8 million, up 36% on the prior corresponding period. Annualised monthly recurring revenue for the period was reported at $638.2 million, up 32% in comparison to the prior corresponding period. The company’s subscriber base grew to 1.818 million, representing an increase of 31% on pcp. The company reported an EBITDA, excluding impairments amounting to $91.8 million, up 42% on the previous year.For the first time in the company’s history, additions from international net subscribers were higher than those from Australia & New Zealand.

EBITDA margin during the period improved modestly due to $18.6 million of impairment costs and acquisition costs of $1.3 million. Gross margin during the year was reported at 83.6%, representing a growth of 2.1 percentage points over the previous year. During the period, the company’s free cash flow reported an increase of $35.0 million as compared to previous year free cash flow $6.5 million.
 

Financial Highlights (Source: Company Reports)
 
Outlook: The company aims to focus on growing its global small business platform and maintain a preference for reinvesting the cash generated to drive long-term shareholder value. For the financial year ended 31 March 2020, the company expects free cash flow to be a similar proportion of total operating revenue as reported in the financial year ended 31 March 2019.
 
Stock Recommendation: The stock of the company generated returns of 55.79% over the period of 6 months. Currently, the stock is priced close to its 52 weeks high level of $66.750. The period was marked by a first ever positive free cash flow result with $6.5 million of free cash flows in FY19. The company also carried on investments for products to support a range of new global features and more specific functionality. Adjusting with positive newsflows, the stock price moved significantly in the last 6-months. Hence, it can be presumed that the majority of the recent developments have been factored in at current level. Hence, considering the above factors, we give an “Expensive” recommendation on the stock at the current market price of $65.680, up 1.719% on 02 August 2019.

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