Appen Limited

APX Details

COVID-19 Impact on Business: Appen Limited (ASX: APX) is engaged in providing data solutions and services for machine learning and artificial intelligence applications for global technology companies, auto manufacturers and government agencies. The market capitalisation of the company as on 11 December 2020, stood at ~$3.20 billion. As per a recent update, the company informed that due to COVID-19 impact on the business, it has not witnessed the ramp up in sales in 4QFY20, which they usually do at this time of the year. APX’s business has been impacted in its key market of California.

1HFY20 Financial Update: During the first half of FY20, the company reported revenues of $306.16 million, an increase of 25% from $245.12 million in 1HFY19. Sales from Relevance segment reported an increase of 34%, to $273.87 million in the same period. Underlying NPAT reduced by 3% to $28.88 million in 1HFY20, from $29.65 million in 1HFY19.

1HFY20 Financial Update (Source: Company Reports)

Outlook: The company operates in a high growth market, and it expects firms to accelerate their AI needs in the post-crisis environment. This puts APX in an advantageous position to capture the market growth, given the track record and highly skilled staff it has got. It has enterprise-wide platform agreement with existing clients, which includes US$80 million annual commitment.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales 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: APX had reported decent financial performance in 1HFY20, despite the impact of COVID-19 in new business development. As per ASX, the stock of APX gave a negative return of 20.25% in the past three months and a negative return of 23.445% in the past one month. As per ASX, the stock of APX is trading below its average 52 weeks’ trading range of $15.7-$43.66. On a technical front, the stock of APX has a support level of $24.779 and a resistance level of $30.304. We have valued the stock using an EV/Sales multiple based illustrative relative valuation and have arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers such as Link Administration Holdings Limited (ASX: LNK), Technology One Limited (ASX: TNE), Iress Limited (ASX: IRE), to name a few. Considering the current trading levels, market leadership, existing client agreements and decent financial performance, we recommend a ‘Hold’ rating on the stock at the current market price of $25.44, down by 2.901% as on December 11, 2020.

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

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