Australia | Jul 15 2019
The realisation that Nearmap will accelerate its investment in growth in FY20 and FY21 has provoked some negative revisions to forecasts. Yet brokers are confident in the outlook.
-Current weakness in stock price considered a buying opportunity
-Breaking even on cash flow in FY19
-Expanding into a multi-product operator in location intelligence
By Eva Brocklehurst
Map imaging company Nearmap ((NEA)) is at the front line of an advance on its North American opportunity, yet its market update produced a negative reaction in the stock. Brokers attribute this to several factors, including the realisation that Nearmap will accelerate its investment in growth during FY20 and FY21, which has likely led to negative earnings revisions.
Monetisation of new products and markets provide upside potential and brokers agree the company is in a strong capital position. The company has guided to North American annualised contract value (ACV) of US$22.7m and Australasian ACV of $57.9m, up 19%. Nearmap will report its FY19 results on August 21.
Canaccord Genuity notes exceptionally strong unit economics. Business conditions in Australia have undoubtedly weakened through the second half, however the broker suspects growth was derived from reduced churn and up-selling products, as well as new customer additions.
Following the enhanced investment in growth initiatives, Canaccord Genuity revises up FY20 and FY21 forecasts for ACV by 4% and 10%, respectively, primarily on the back of US growth. This in turn reduces like-for-like FY20 and FY21 estimates for operating earnings (EBITDA) by -45% and -35%, respectively.
Citi reiterates a Buy rating, assessing the current weakness in the stock price as a buying opportunity. Macquarie agrees with this assessment, and considers the FY19 outcome, slightly lighter than expected, is fully reflected in the share price.
The company has furnished its preliminary FY19 numbers but, with only high-level insights, Citi does not know for sure whether volume or price was the primary driver of growth. Assuming gross margins remain flat, this implies churn has continued to fall. The company is intent on capitalising its position in the US, planning a second US office in New York.
In anticipation of ongoing expenditure, Citi lifts FY20 estimates for sales and marketing expenses growth to 50%. This may dampen earnings in the short term but the company will be intent on converting that investment into earnings as quickly as possible, in the broker's view.