Appen Limited

APX Details

Interest Acquired: Appen Limited (ASX: APX) operates through Relevance and Speech and Image segments offering linguistic services and annotated training data, which is used as an input to facilitate the performance of search engines, social media, e-commerce applications worldwide. On 13 August 2021, Director Richard Freudenstein acquired and held 30,000 ordinary shares in APX after his recent appointment as an Independent Non-Executive Director.

Acquisition of Quadrant:

• Recently, APX declared to acquire Quadrant, a leader in Point-of-Interest (POI) data and mobile location, to expand its range of data capabilities, product offering, and access growth avenues in the global location intelligence market.
• The transaction will close in September 2021, and Quadrant’s CEO will join the APX Board.
• Appen plans to invest further in Quadrant’s market and product expansion in 2021 and 2022 and estimates this move will lower its underlying EBITDA by ~US$2mn in FY21.
• APX will acquire all issued share capital of Quadrant via an upfront US$25mn cash payment. The company will pay up to US$20mn and issue shares in APX upon realising revenue milestones in 2022 and 2023. APX will fund the US$25mn cash payment from its existing cash reserves.

1HFY21 Highlights:

• Revenue Decline: APX reported a decline in revenue and other income to US$196.56mn in 1HFY21, down by 2% YoY due to the impact on Global Services revenue as the customers plan to spend on new and non-ad related projects to boost their revenue.
• A Decrease in NPAT: The company registered a lower net profit after tax of US$6.69mn, down by 55.1% YoY in 1HFY21.
• Dividend Declared: The Board has declared to pay a 50% franked interim dividend of 4.5 cents per share for 1HFY21, payable on 24 September 2021.
• Increase in ACV: APX posted growth in its annual contract value (ACV) to US$119.6mn, an increase of 16% YoY in 1HFY21.
• Cash Balance: APX held US$66mn cash and remained debt-free as of 30 June 2021.

Total Revenue & Net Income 2HFY19-1HFY21; (Analysis by Kalkine Group)

Key Risks:

• COVID-19 Impact: APX witnessed lockdowns on its customers’ businesses, particularly in California, leading to project deferrals, low customer engagement levels, and reallocation of project resources.
• Technology Risk: The company risks business disruptions due to investment and innovation in technology.

Outlook:

• APX re-estimates the Underlying EBITDA guidance for FY21 from the US $83 - $90mn to the US $81 - $88mn (forecasted towards the low end of the guidance owing to ad-related project impacts).
• APX forecasts a more robust order book and revenue skewed towards 2HFY21 based on its customers’ delivery schedule.
• APX reported ~US$360mn of YTD2021 revenue and orders in hand for delivery as of August 2021 versus US$328mn guidance given in August 2020.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of APX gave a negative return of 20.18% in the past three months and a negative return of 41.41% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $9.980 - $37.000. The stock has been valued using an Enterprise Value to EBITDA based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median, considering its lower revenue, NPAT, the business impact on the Global Services revenue and its customers in 1HFY21 and risk of skewed project deliveries. For the purpose of valuation, few peers like Computershare Limited (ASX: CPU), Data#3 Limited (ASX: DTL), Link Administration Holdings Limited (ASX: LNK) have been considered. Considering the current trading levels, higher YTD21 revenue, growth in ACV and New Markets business, new non-ad related projects, expected expansion through Quadrant acquisition, order pipeline for FY22, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $10.240, 12: 59 PM, (GMT+10), Sydney, Eastern Australia, as on 8 September 2021.

APX Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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