Upgrades Happening Again At Appen

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Appen is establishing a trend in guidance upgrades, while indicating revenue has become more evenly spread throughout the year.

-Content relevance, LeapForce driving earnings growth
-Operating cash flow offers flexibility
-Currency tailwind probable
 

By Eva Brocklehurst

It's all happening for Appen ((APX)), the search data service provider, which has upgraded 2018 earnings guidance because of a sharp increase in monthly revenue. The company has established a trend of earnings upgrades, and this is the second in three months.

Canaccord Genuity notes little detail around the drivers of the upgrade, save for the observation there was a sharp increase in orders from existing customers. The broker estimates the top two customers represented around 80% of revenue in the first half and increases revenue forecasts by 10% for 2018.

This upgrade is another example, in Citi's opinion, where both new and existing customers are using the company's expertise to develop new products and enhance existing capabilities. Appen enables companies to expand into new markets by improving search engines, social media platforms and e-commerce sites.

2018 operating earnings (EBITDA) guidance has been upgraded to $62-65m, which represents a 12% upgrade at the mid point from prior guidance. Citi reiterates a Buy rating and raises forecasts by 7-11% for 2018-20 and upgrades its target to $17.31 from $17.13.

The broker is positive about the company's ability to win work over the short to medium term, in particular after the US LeapForce acquisition. Canaccord Genuity agrees that content relevance, including LeapForce, have provided earnings bridges in 2018 and will remain the drivers of earnings growth.

For 2019 Canaccord Genuity assumes modest underlying growth rates in language resources but eases back on its margin assumptions, to 18% from 21%. Underlying growth rates in content relevance have been increased, with the operating earnings margin forecast to be flat at 22%.

The upgrade to guidance indicates that, on the broker's calculations, orders are now becoming more evenly spread throughout the year, with the order book of $250m in August 2018 representing around 67% of the full year revenue forecast. This compares with 2016 when the August order book represented 90% of the full year, and 2017 when that figure fell to 84%.

Canaccord Genuity is impressed with the return on equity and invested capital of 37% and 26%, respectively, on 2018 forecasts. The stock warrants a premium valuation, in the broker's view, given the track record of consistently increasing earnings estimates, while operating cash flow offers flexibility for management.

Currency

Despite the US dollar having appreciated in recent months, the company left its FX assumption at US80c, which signals to brokers that currency could be a tailwind. UBS estimates the impact on 2018 earnings is around $200,000 for every US1c move in the exchange rate. Therefore, should the spot rate of US72c continue for the remainder of the year, this would add $1.6m or 2% to the top end of guidance. UBS maintains a Neutral rating and $15.65 target.

Canaccord Genuity also suggests a US80c exchange rate is increasingly unlikely for 2018 and incorporates a flat exchange rate of US75c for 2019, which allows for some appreciation in the Australian dollar from its current rate. This results in a 23% increase in the broker's 2019 revenue forecasts and a 16% increase in operating earnings estimates, to $84.5m. Canaccord Genuity retains a Hold rating, nudging the target up to $16.00 from $15.60.

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