Australia | Mar 18 2020
Altium may have slightly lowered FY20 guidance but brokers are confident there is a long-term opportunity in the stock, and the valuation is attractive.
-May need to invest more in sales & marketing
-Aspirational targets still appear achievable
-Materially de-rated versus software stocks globally
By Eva Brocklehurst
Altium ((ALU)) may be well-placed to weather the coronavirus storm as its electronic design work is not tied to manufacturing volumes. FY20 guidance may still be optimistic but brokers assess the valuation is highly attractive.
UBS upgrades to Buy and notes Altium is now trading on an FY21 price/earnings (PE) ratio of 33.8x with a FY21-23 compound growth rate in earnings per share of 30%.
The commercialisation of the relationship with Dassault is also a material catalyst for the near term. Still, Altium is unlikely to achieve its FY20 guidance range of US$205-215m, brokers suspect, as the impact of coronavirus globally has come into play since the February results.
Nevertheless, UBS does not envisage this will be materially lower, with revenue of US$204m anticipated, slightly below the lower end of guidance. This reflects an expectation that Altium will need to invest more heavily in sales and marketing to offset the pressures from the pandemic.
Referring back to the GFC, industry feedback revealed the impact was relatively minor for printed circuit board design software, and the focus turned to research and development to capture the next wave of demand when economic conditions improved.
The aspirational targets set for FY25 of US$500m in revenue and operating earnings margins of more than 40% remain achievable. UBS notes the upside risk in relation to this target stems from accelerating momentum in China, as well as lower churn from a more automated platform and faster adoption of Altium365.
Bell Potter agrees the aspirational targets are achievable and has a Buy rating, recently upgraded from Hold, with a $35 target. The broker suggests the main risks centre on FY20 guidance being downgraded because of a worsening macro environment. The broker now forecasts an operating earnings margin of 39.8%.
UBS asserts the category is less likely to be affected by coronavirus compared with other parts of the electronics value chain. There are also options on the balance sheet and, given a strong market position, the company may even be a focus for corporate activity.
Ord Minnett, earlier this month, jumped straight to Lighten from Buy, believing the stock represented good value. The share price had fallen -23% through February and, despite the unknowns, this is a material de-rating compared with software stocks globally.
The broker assesses the valuation is broadly similar to late 2018 when software stocks de-rated globally on the back of rising interest-rate expectations. Moreover Altium is trading below global small cap software stocks at present.
Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, also believes Altium is a potential takeover target as it is a top-five player in a growing global market while still obtaining market share.
A strong earnings growth path and strategic opportunities means Macquarie is also positive. It is difficult to know the extent to which coronavirus will affect the economy, and the broker points out Altium relies on perpetual license sales so weaker sentiment could delay sales to some extent.
This also makes near-term earnings more vulnerable to market shocks compared with those that are more heavily skewed to subscription revenue. Still, the company is in a net cash position and generates cash so the balance sheet should be sound.
There are three Buy ratings on the database, and all were upgrades in March. The consensus target is $36.13, suggesting 51.0% upside to the last share price.
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