Company Overview: Appen Limited (ASX: APX) was founded in 1996 and is engaged in developing high-grade human automated datasets for artificial intelligence and machine learning (ML). The company reports under two segments, namely (1) Relevance and (2) Speech & Image (S&I). The company serves technology, financial services, automotive, government, healthcare, and retails industries. APX has expertise in ~235 languages and entrance to a global group of more than 1,000,000 experienced contractors.

APX Details

Decent Liquidity Position and New Customer Wins Aid APX: Appen Limited (ASX: APX) is involved 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 28 May 2021 stood at ~$1.63 billion. The company remains on track to boost its performance and continues to invest in new technology. The company has restructured its organisation and aligned it to a product-led and customer-centric strategy. The company has also made changes to its financial reporting to offer better visibility to its overall business. As the company’s business progresses and turns towards a product and technology platform, it seeks for better proportions of contracted revenue streams. The company is witnessing higher expansion in its number of customers and the varied range of industries, ranging from automotive to retail and fashion to healthcare.

Notably, from a language data service provider, the company has evolved to become the leading AI data annotation services provider. The recent product-led strategy strengthens its foothold in key new markets, drive growth and provided high-quality training data, at larger scale and with better unit economics. The company has also developed a robust product suite of market leading platform via recent acquisitions and engineering investment. The rise in annotation difficulty and new use cases has compelled worldwide customers to use APX’s training data products, thus enabling expansion through improved quality and greater productivity benefits.

Taking about FY20 key numbers, the company reported revenues of $599.9 million, an increase of 12% from $536 million in FY19, owing to an increase in existing and new Relevance projects with existing customers. The company’s Annual Contract Value (ACV) rose substantially to US$124 million as at 1 February 2021, from US$25 million reported at 2019-end. It experienced a 23% rise in statutory EBITDA and 8% in underlying EBITDA during FY20. Statutory NPAT increased by 21% year over year to $50.5 million in FY20. Sales from Relevance segment reported an increase of 15%, to $538.2 million in the same period.  Speech & Image segment revenues, however, declined 10% year over year and came in at $61.2 million.

Key Trends; Analysis by Kalkine Group

New Customers, Project Wins Enhancing Shareholder’s Value: The company remains on track to gain from new projects, new customers wins and its entrance into the China market. Notably, revenues in China increased by 60% every quarter in FY20, thus expanding the company’s market share and delivering a robust base for future growth. In FY20, the company’s initiatives to make higher investments in sales and marketing yielded ~136 new customers across a variety of sectors and data types. Global customers delivered solid growth underpinned by large programs in FY20. Notably, global customers in 2HFY20 stood at 190, up from 172 customers in 2HFY19. APX also extended the number of projects by 34% across its top five customers, thus, encouraging many new product advancements. The company also remains on track to enhance its shareholder’s value through dividends. Recently, the company has declared a final dividend of AUD 0.055, with an ex-date of 1 March 2021 and a payment date of 19 March 2021. Further, in 2020, the company declared full-year dividend of 10.0 cents per share, depicting a rise of 11% from the prior corresponding period.

Customers & Project Wins; Analysis by Kalkine Group 

Key Metrics, Balance Sheet & Liquidity Position: For FY20, the company reported a net margin of 8.4%, higher than the year-ago figure of 7.8%. ROE of the company stood at 10.4%, against the industry median figure of -2.5%. In FY20, the company’s debt to equity ratio stood at 0.05x, lower than the industry median figure of 0.49x. The company’s balance sheet continues to grow, with net assets increasing to $485.87 million as at 31 December 2020. APX has cash and cash equivalents of ~$78 million at the end of FY20, which was after the full repayment of debt, growth investments and expanded dividend and tax payments. Net cash flow from operating activities increased by 39% year over year and came in at $93.57 million in FY20.

Profitability and Leverage Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 23.14% of the total shareholdings, while the top 4 constitutes the maximum holding. Vonwiller (Christopher) is the entity, holding maximum shares in the company at 7.37%. The Vanguard Group, Inc. is the second-largest shareholder, with a holding of 4.86%, as also highlighted in the chart below: 

Top 10 Shareholders, Analysis by Kalkine Group 

Risk Analysis: The company has more than 90% of its revenue and assets in US dollars. This exposes the company to foreign exchange currency fluctuation risks. The company is also battered by cyber security risk, stiff competition, and regulatory concerns. Further, the company’s financial performance can be battered by increasing headcounts and personnel costs. This, in turn, may weigh on margin expansion, going forward. Also, rising expenses adds to the woes. It is worth noting that a major portion of the company’s revenue is focused on a limited number of customers. Therefore, loss of one or more top ten customers, may decrease orders for the company’s services, and may dampen its financial stability.

Outlook: The company’s ongoing investment in AI-enabled annotation is enhancing efficiency and is expected to further bolster APX’s competitive position.  The company has a robust existing pipeline of new customers in markets and in new business lines such as shipping, education, and healthcare for FY21. Further, the company is involved in many of new projects, which are in their nascent stages and expanding. The company expects these projects to aid its major programs and recommence in 2021. Further, APX expects key projects, which were delayed in late 2020, to return with a skew to delivery in 2HFY21. For FY21, the company expects new market growth at circa 25%. For FY21, the company expects underlying EBITDA to be in the range of $83 million- $90 million. Also, it expects FY22 gross cost savings (before reinvestment) of US$15 million. The company’s healthy balance sheet and skilled management team along with its long-term nature of customer relationships place APX for considerable long-term growth.

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: Over the last three months, the stock went down by ~19.23% and went down 13.9% in the past one month. The stock made a 52-week low and high of $10.65 and $43.66, respectively. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at a slight premium to its peer average, considering its decent top-line performance, increase in customer base, enhancing shareholder’s value, decent cash position and encouraging outlook. We have taken peers like Altium Ltd (ASX: ALU), TechnologyOne Ltd (ASX: TNE), to name a few. Considering the above factors, existing pipeline of robust customer base, decent FY20 financial performance, current trading level, and positive long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $13.43, up by ~0.977% on 28 May 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 decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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