Stocks’ Details

Altium Limited

Decent Growth in Revenue: Altium Limited (ASX: ALU) is involved in the development and sales of computer software for the design of electronic products. The market capitalisation of the company stood at $4.38 Bn as on 17^th August 2020. Recently, the company released its FY20 results, wherein, it reported growth of 10% in revenue to US$189 million. The company experienced solid performance in all core business units and key regions. Profit before tax for the period went up by 12% to US$65 million. Also, the company witnessed a record growth of 17% in the subscription base to 51,006 subscribers. The company’s performance reflects its strength, its business model adaptability, and organizational versatility to execute successfully in multiple fronts and varying conditions.

Revenue Breakdown (Source: Company Reports)

Target for Long-Term: The company is expecting to achieve 100,000 subscribers by 2025. It’s 2025 goal of achieving US$500 million in revenue may take an additional 6-12 months. ALU is also committed to provide a more stable & predictable revenue model as it moves from software to a cloud-based platform.

Key Risks: The company’s business is exposed to strategic risk, financial risk, and compliance and regulatory risk, which could adversely impact financial performance. In addition, the business is also sensitive to market risks, such as foreign exchange risk and interest rate risk.

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: The company will pay an unfranked final dividend of A$19 cents per share on 24^th September 2020. ALU managed to close FY20 with a strong cash balance of US$93 million, reflecting a rise of 16% on the same period last year. On technical analysis front, the stock of the company has a support level of ~A$31.761 and a resistance level at ~A$36.688. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). For the purpose, we have taken peers such as NEXTDC Ltd (ASX: NXT), WiseTech Global Ltd (ASX: WTC) and Xero Ltd (ASX: XRO). Therefore, considering the growth in revenue and subscribers, decent cash balance and long-term targets, we maintain a “Hold” rating on the stock at the current market price of $33.920 per share, up by 1.344% on 17^th August 2020.

Codan Limited

Strong Demand for Metal Detectors: Codan Limited (ASX: CDA) is a technology company, which designs, manufactures, and markets a diversified range of high value-added electronic products for sophisticated consumer markets, governments, and businesses. The market capitalisation of the company stood at $1.48 Bn as on 17^th August 2020. In a recent trading update, the company stated that it is experiencing strong demand for its metal detectors in its recreational and gold mining markets. In the month of May 2020, the Tactical communications business of the company delivered a project of $7 million. As a result, the group witnessed record sales month in May 2020 and has returned to operating at similar levels to the record first-half run rate. During 1H FY20, CDA experienced a growth of 34% in sales due to strong demand for gold detectors in Africa across multiple products and large communications project wins.

Sales (Source: Company Reports)

Key Risks: The company is exposed to several risks, including credit risk, liquidity risk, market risk and operational risk. CDA minimizes the concentration of credit risk by undertaking transactions with a large number of customers in various countries.

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings 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: The company has cemented its balance sheet with a net cash balance of $85 million. Net margin of the company stood at 17.8% in 1H FY20 as compared to the industry median of 9.2%. This indicates that the company possesses decent capabilities to convert its top line into the bottom line. On technical analysis front, the stock of the company has a support level at ~A$7.86 and a resistance level at ~A$9.139. We have valued the stock using the P/E multiple based illustrative relative valuation method, and for the purpose, we have taken peers such as Bravura Solutions Ltd (ASX: BVS), TechnologyOne Ltd (ASX: TNE), Citadel Group Ltd (ASX: CGL), and arrived at a target price of high single-digit upside (in percentage terms). Thus, in light of the strong demand for metal detectors, resilient balance sheet, and sales growth in 1H FY20, we give a “Hold” recommendation on the stock at the current market price of $8.940 per share, up by 8.364% on 17^th August 2020.

WPP AUNZ Limited

Extension and Renewal of Debt Facilities: WPP AUNZ Limited (ASX: WPP) is engaged in the provision of marketing, content, and communications services. The market capitalisation of the company stood at $281.21 Mn as on 17^th August 2020. Recently, the company announced renewal and extension of its $420 million debt facilities with a syndicate of four banking partners. These include a $270 million 3-year term facility, with maturity extended from June 2021 to August 2023 and a $150 million rolling annual working capital facility, with maturity extended from June 2021 to August 2021. The company added that the extension of facilities proactively decreases the financial risk in the business and provides stability and flexibility to drive growth. The company is accelerating the transformation of its business to respond to industry changes as well as to place strongly for an economic recovery. The below picture provides an overview of financial performance for FY19:

Key Financials (Source: Company Reports)

Guidance: The company is likely to release its 1H FY20 results on 20^th August 2020, wherein, it is expecting to report headline EBIT in the range of $10 million to $14 million. The company anticipates to report non-cash impairment of intangible assets between $150 million to $190 million.

Key Risks: The company’s business activities are exposed to a variety of financial risks, which could impact its growth. These include foreign exchange risk, interest rate risk and credit risk.

Stock Recommendation: Current ratio of the company stood at 0.83x in 1H FY20, reflecting YoY growth of 1.2%. This indicates that the company is well-placed to settle its short-term obligations. WPP has an EV/Sales multiple of 0.6x as compared to the industry average (Media & Publishing) of 1.9x on TTM basis. On technical analysis front, the stock of the company has a support level at ~A$0.272 and a resistance level at ~A$0.376. The stock has an EV/EBITDA multiple of 4.2x against the industry median (Consumer Cyclicals) of 8.7x on TTM basis. Therefore, considering the extension and renewal of debt facilities, guidance for 1HFY20, decent liquidity position and key risks, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.335 per share, up by 1.515% on 17^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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