Appen Limited

Company Overview: Appen Limited (ASX: APX) is engaged in developing high-grade human automated datasets for Artificial Intelligence (AI) and Machine Learning (ML) applications catered to technology, financial services, healthcare, automotive, retail companies, and government bodies. The company has over one million skilled contractors, in over 70,000 locations and 170 countries.

APX Details

APX Rides on New Market Expansion & Global Customers’ focus: Recently, the company expanded its portfolio in the location intelligence market with the acquisition of Quadrant Global Pte Limited. With the move, APX plans to invest further in Quadrant’s market and product expansion in 2021 and 2022. In addition, it remains on track to invest higher in New Markets, thus opening avenues for revenue growth, more customers, and higher ACV. Further, an AI-enabled product suite is likely to aid APX to bolster its position in new markets and deliver automation and scalability. 

A Quick Look at 1HFY21 Key Results (for the Period Ended 30 June 2021): 

• New Approaches: The company’s global customers remain on track to work upon new approaches to ad-targeting that handle privacy issues, and differential privacy techniques. The company expects prospects to strengthen these programs as higher solutions are being adopted and the requirement for new training data is increasing.
• Robust Growth in New Markets: In 1HFY21, the company witnessed an increase of 31.5% year over year in New Markets, aided by product-led growth and robust performance in its China and Enterprise businesses. Notably, at the end of 30 June 2021, the company’s sales teams earned 74 new customers and had total active customer base of over 320 across diverse industries and geographies.
• Rise in Global Product Revenues: Revenues from Global Product increased a whopping 15.2% and came in at US$22.3 million, primarily due to higher adoption of products by customers to enable their new AI investments. This reflected a CAGR of 32% from 1HFY19-1HFY21.
• Exposure in China Market: In the last five quarters, revenue in China increased at a compound rate of 60%, thanks to the deepened relationship with China’s leading technology companies and new customers win. This, in turn, aided the company to expand its position in speech, image, and autonomous vehicles.
• Higher Investments: The company invested ~10.8% of the revenue earned during 1HFY21 in product development to expand the market reach and new opportunities. During the period, the company’s US$21.2 million depicts a higher focus on customer wins, scalability, repeatability, quality, and margin expansion.
• Top & Bottom Line: Total revenues in 1HFY21 went down by 2% on pcp, due to lower-than-expected Global Services revenue. Underlying NPAT also declined 35% on pcp, owing to increased amortisation associated with an investment in product development.
• Liquidity Position: The company’s cash balance stood at~US$66 million with nil debt as on 30 June 2021. The company reported cash conversion rate of ~101% of underlying EBITDA in 1HFY21.

The below picture depicts a rise in APX Revenues from Global Product’s from 1HFY19 to 1HFY21.

Annual Contracted Value Highlights; Analysis by Kalkine Group

Key Metrics: In 1HFY21, the company recorded a current ratio of 2.86x compared to the 1HFY20 figure of 2.58x. The debt-to-equity ratio for the period stood at 0.05x, lower than the industry median of 0.51x.

Liquidity and Leverage; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 23.98% of the total shareholdings, while the top 4 constitutes the maximum holding. Vonwiller (Christopher) is the entity, holding maximum shares in the company at 7.36%. 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 faces the risk of technological changes, geopolitical changes, COVID-19 uncertainties, and integration synergies from the recent acquisitions. APX’s has incurred a net loss in IHFY21, thus, these mounting losses may drain existing liquidity and affects the operations. Also, the company’s financial performance might get impacted by caution in buying behaviour. The company is also exposed to foreign currency fluctuation risks and stiff competition from peers, who develop similar product lines and services.

Outlook: The company remains on track to gain from the ongoing demand of customers for high-quality annotated data and enhanced focus of global technology customers on new AI products and applications. Higher investment in product development, will aid customer growth in New Markets and lay a robust foundation for APX’s further growth. The company has provided revised underlying EBITDA guidance to ~US$81-$88 million, from US$83-$90mn, due to planned investment in Quadrant. APX expects mid-high single-digit revenue growth for its Global Services’ division and circa 25% for its New Markets division in FY21. In addition, a stronger order book, robust product pipeline, expected skewed 2HFY21 customers’ delivery schedule, e-commerce, digital advertising, and search programs are other key positives for APX. 

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 ~44.31% in the past nine months. Currently, the stock is trading close to its 52-week low level of A$8.36. 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 as compared to its peers, considering rising losses, narrowed guidance for Underlying EBITDA, risk of skewed project deliveries, etc. For the purpose of valuation, peers such as TechnologyOne Ltd (ASX: TNE), Data#3 Limited (ASX: DTL), Iress Ltd (ASX: IRE) and others have been considered. Considering acquisition synergies, zero debt as at 30 June 2021, growth in ACV and New Markets business, order pipeline for FY22, current trading levels, indicative upside in the valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $11.96, as on 19 November 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

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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