Altium Limited

Company Overview: Altium Limited (ASX: ALU) develops and sells computer software for the 3D design of electronic products and embedded systems. The company has two reportable segments: Boards and Systems and Nexar. The company was listed on ASX on 4 August 1999.

ALU Details

This report is an updated version of the report published on 27 May 2022 at 3:55 PM GMT

Decent Operational & Financial Fundamentals Aids ALU: ALU is well placed to take advantage of post-pandemic conditions, thanks to its strategic turn to the cloud services during COVID-19 via a diversified business model, organisational changes, and sale of non-core assets.

• To sustain growth and take advantage of opportunities, ALU is taking necessary measures to transition to a cloud and platform company. In doing so, it is scaling enterprise sales and implementing its cloud platform, Altium 365. Notably, in 1HFY22, Altium 365 monthly active users and monthly active accounts increased by 54% and 29%, since August 2021, respectively. Given the impact of the above-mentioned strategies, ALU expects its margin to climb to ~38%-40% by FY25-FY26.

Highlighted below are the notable business updates:

Recent News Highlight; Analysis by Kalkine Group

Segmental Highlight for 1HFY22 Results:

• Board and Systems: This segment deals with ALU’s traditional CAD software business, which provides PCB design software solutions. During the period, the company reported segmental revenues of US$79.16 million, depicting an increase of 16% year over year. Robust growth in PCB revenue (Up by 16% YoY), strong performance from both EMEA and the US (up 25% and 14%, respectively), and record pricing levels positively impacted the segmental operations. Further, higher revenues from Altium Designer (up 15% YoY), and robust revenue from NEXUS and Concord Pro were other key positives.

• Nexar: This segment deals with a new business unit that provides access to the massive ecosystem of electronic design and manufacturing users and customers. Nexar includes Octopart, and manufacturing (Altimade). During the period, the company reported segmental revenues of US$23 million, up from US$11.8 million reported in 1HFY21. ALU witnessed a revenue rise of 105% from its Octopart, buoyed by chip shortages in the semiconductor industry. During the 1HFY22, Octopart faced a 70% increase on a year over year basis in weekly active users.

Financial Highlight; Analysis by Kalkine Group

Key Metrics: For 1HFY22, the company reported an EBITDA margin of 34.3%, higher than the year-ago figure of 30.7%.

Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 40.72% of the total shareholdings, while the top 4 constitute the maximum holding. Pinnacle Investment Management Group Ltd held the maximum number of shares with a percentage holding of 8.68%, followed by Mirkazemi (Aram) holding 7.24%, as also highlighted in the chart below:

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

Woes; Analysis by Kalkine Group  

Outlook: The company remains on track to achieve a target of US$500 million in revenue, 100,000 subscribers, and a target of 95% recurring revenue (ex-China and developing countries) by 2025. The company has upgraded its revenue outlook for FY22 and now expects it to be in the high-end of the guided range. For FY22, the company expects revenues to be in the ambit of US$213 million to US$217 million (18-20% growth). Underlying EBITDA margin and ARR growth are expected to be between 34-36% and 23-27%., respectively. Going further, it expects robust momentum from its core PCB business, and a positive response to Altium 365 from its key customers, given the overall global electronic parts shortage. 

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 the company has been corrected by ~31.24% in the past six-months. Currently, the stock is trading below the average of its 52-week high and low levels of $45.3 and $24.97, respectively. 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 some discount as compared to its peers, considering the stiff competition, COVID-19 led uncertainties, technology disruptions, etc. For the purpose of valuation, peers such as Infomedia Ltd (ASX: IFM), Appen Ltd (ASX: APX), Xero Ltd (ASX: XRO), and others have been considered. Given decent 1HFY22 performance, rise in cash flow, increase in ARR and active customers, positive outlook, current trading levels, and indicative upside in the valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $28.06, as on 27 May 2022, 11:35 AM (GMT+10), Sydney, Eastern Australia. 

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

ALU 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.

Disclaimer

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