Appen Limited

APX Details

 1HFY21 Results: Appen Limited (ASX: APX) offers data services and solutions for artificial intelligence (AI) and machine learning. APX operates relevance and speech & image segments. It serves sectors such as automotive, retail, technology, healthcare, financial services, and government agencies.

• APX is reshaping to offer Artificial Intelligence (AI) driven data and solutions. It is implementing broader applications, greater capabilities, and improved unit economics.
• The underlying EBITDA declined by ~14.3% YoY million due to investment in the New Markets division in 1HFY21 and fully annualised costs for growth investments in FY20.
• The New Markets division posted an increase of ~31.5% YoY to ~US$47.8 million in 1HFY21.
• The total liabilities declined to ~US$75.93 million as of 30 June 2021 versus ~US$88.27 million as of 31 December 2020.
• APX had ~US$360 million revenue and orders in hand as of August 2021.

Key Financial Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of technological changes, reliance and retention on competitive and skilled staff, peer competition, and COVID-19 uncertainty.

Outlook:

• The data annotation market is anticipated to grow at ~25% CAGR from ~US$2.5B in 2021 to over ~US$5 billion by 2024.
• The company has narrowed down the guidance for underlying EBITDA from ~US$83 - $90 million to ~US$81 - $88 million in 1HFY20 due to the planned investment in the recently acquired Quadrant business. It further expects that underlying EBITDA to be at the lower end of the spectrum owing to the impact of ad-related projects. The FY21 underlying EBITDA margins are expected to be in line with FY20.
• APX forecasts a mid-to-high single-digit revenue growth for its Global Services division and ~25% growth for the New Markets division.
• The gross margin is anticipated to improve in 2HFY21 in line with FY20 owing to higher revenue, project, and customer mix.
• It expects a moderate expense growth in 2HFY21 and cost savings of ~US$15 million from restructuring in FY22.

Valuation Methodology: P/E 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 ~2.00% in the past three months and a negative return of ~29.38% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $8.360 - $28.260. The stock has been valued using the P/E-multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median P/E multiple, considering its impacted 1HFY21 financials, COVID-19 disruptions, and narrowed down guidance of underlying EBITDA. For this purpose of valuation, few peers like TechnologyOne Limited (ASX: TNE), Data#3 Limited (ASX: DTL), Class Limited (ASX: CL1) have been considered. Considering the current trading levels, new customer wins in 1HFY21, expected growth of New Markets division and Global Services division in FY21, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $9.560, as of 10 December 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

APX Daily Technical Chart, Data Source: REFINITIV  

Integrated Research Limited

IRI Details

Issue of Performance Shares & Options: Integrated Research Limited (ASX: IRI) develops and markets systems and applications management computer software for unified communication (UC) networks & payment networks, and business computing. It serves the US, Europe, and the Asia Pacific. On 2 December 2021, IRI issued ~1.03 million performance shares to staff under a long-term incentive plan.

• On 1 December 2021, IRI issued 1.796 million options (unlisted shares) at ~$1.98 exercise price to Peter Adams, a KMP (key management personnel) under a long-term incentive plan.
• On 1 December 2021, Director, John Ruthven was issued options as per the company’s performance rights and option plan and post approval at the AGM held on 24 November 2021 by the shareholders.

Trading Update & Management’s Address at the AGM:

• The company is now running the business on the newly introduced SaaS metrics such as TCV and cash flow. On a YTD basis, its Total Contract Value (TCV) increased on pcp owing to early traction of new products which are licensed in hybrid environments.
• Though the reported YTD revenue and net profit are broadly consistent on a pcp basis, the revenue mix is slightly impacted as SaaS contracts are recognised over time. The cash flow is also reported to be positive.
• The company is implementing a “Transform IR” program, shifting towards providing SaaS and cloud-based solutions and adopting new ways of software licencing. IRI wants to benefit from the structural market dynamics of hybrid working and cashless payments.
• IRI is gaining traction via new customer wins such as NYPD, University of Utah, HCL, Westpac, and partnership extensions such as ServiceNow in FY22.
• Notably, IRI has inked multi-year contracts (non-cancellable) with annual payments with a large part of its customers. These contracts underpin ~65% of cash receipts of FY22.

Key Financial from 1HFY20-2HFY21; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of technological changes, forex headwinds, structural changes in the industry. It faces the COVID-19 impact of deal deferrals and prudent capital spend by customers.  

Outlook:

• IRI continues to transition the business towards a self-sufficient SaaS (cloud and subscription-based) business. It believes in responding to the changing business needs, TNT will expand its total addressable market (TAM) and accelerate revenue growth. It expects cloud revenues to increase faster than on-premises revenue.
• IRI is also evaluating its channel strategy and plans to refine its go-to-market strategy in the next twelve (12) months. It plans to introduce a flexible pricing model to customers willing to shift to a cloud-based model.
• IRI will prioritise product development, winning new customers, and rolling out new products in FY22.

Valuation Methodology: P/E 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 IRI gave a negative return of ~34.94% in the past three months and a negative return of ~43.19% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $1.135 - $3.350. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average P/E multiple, considering its decline in FY21 results, a slight uptick in debt-to-equity ratio, the risk of structural changes in the industry, and timing of SaaS revenue realisation. For this purpose of valuation, few peers like Over the Wire Holdings Limited (ASX: OTW), Iress Limited (ASX: IRE), Nuix Limited (ASX: NXL), and others have been considered. Considering the current trading levels, diversification towards an evolving business model & SaaS subscription revenue, continuing product innovation and enhancements in FY21, new customers in FY22, positive cash flows, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $1.210, down by ~5.099%, as of 10 December 2021.

IRI Daily Technical Chart, Data Source: REFINITIV  

Tesserent Limited

TNT Details

Entered Acquisition Agreements: Tesserent Limited (ASX: TNT) offers cloud, managed services, and cyber security consulting services to firms, education providers, and government customers in Australia and overseas. On 7 December 2021, TNT declared the acquisition of Claricent Pty Limited (Claricent) and Pearson Corporation Pty Limited (Pearson) by signing two distinct share purchase agreements with the corresponding vendors.

• TNT plans to integrate the two acquired businesses into its North Security business which heads the Federal Government team.
• Pearson business is expected to generate an unaudited revenue and EBITDA of ~$21.5 million and ~$4.8 million in FY22.
• Claricent business is expected to deliver ~$2.8 million revenue and ~$0.75 million EBITDA for FY22.
• The acquisition is expected to be earnings, EPS, and cash flow accretive and get finalised by 31 December 2021. The deal is also expected to generate considerable locked-in recurring revenue as the six months performance of the companies gets consolidated into TNT’s FY22 financials.
• The company will pay the acquisition consideration in two instalments via a mix of cash and shares in TNT. ~50% of the enterprise value is expected to be paid in December 2021 and ~50% will be paid on the compilation of audited financials around September 2022.
• TNT financed the acquisitions through the recently raised capital at the close of September 2021.

Trading Update as on the Date of AGM Held (19 November 2021):

• The company had ~$15.2 million net debt and ~$19.8 million cash as of 15 November 2021.
• TNT has ~43 companies within the ASX 100 currently as its customers.
• TNT is cash flow positive since the start of FY21.
• The company witnessed ~41% organic growth and ~109% inorganic growth in its underlying business units.

Liquidity & Debt Position; (Analysis by Kalkine Group)

Key Risks: The company faces cybersecurity risks, regulatory delays/changes, industry competition, and realisation of synergies from multiple acquisitions.

Outlook:

• TNT aims to deliver ~$200 million turnover, ~15% operating EBITDA margin, and ~50% Annual Recurring Revenue (ARR) in the short term.
• TNT estimates to complete the two acquisitions by December 2021.
• With the acquisition of these companies, TNT will strengthen its position in the Federal Government marketplace and implementation of large long-term projects to the Government.

Valuation Methodology: EV/Sales 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 TNT gave a negative return of ~22.72% in the past three months and a negative return of ~22.72% in the past six months. The stock is currently trading towards its 52-weeks’ average price level band of $0.150 - $0.440. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ median EV/Sales multiple, considering its negative net margin, negative ROE, the risk of synergies from multiple recent acquisitions, and forex rate changes. For this purpose of valuation, few peers like Integrated Research Limited (ASX: IRI), Adacel Technologies Limited (ASX: ADA), Reckon Limited (ASX: RKN), and others have been considered. Considering the current trading levels, improved cash position as of 15 November 2021, growth in FY21 revenue, expected earnings, cash flows, and EPS accretion from the two acquisitions, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.170, as of 10 December 2021, 11:22 AM (GMT+10), Sydney, Eastern Australia.

TNT 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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