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High Level Of Confidence In Appen

Australia | Jun 02 2020

This story features APPEN LIMITED. For more info SHARE ANALYSIS: APX

Demand for services provided by Appen is robust, given data annotation is critical to large technology companies amid the surge in demand for e-commerce.

-One of few stocks reiterating earnings guidance
-Ongoing review of capital management priorities
-Upside potential from new sectors


By Eva Brocklehurst

A confirmation of earnings guidance has signalled a high level of confidence from Appen ((APX)) that its services will remain in demand, despite the disruptions caused by the pandemic.

Citi expects the business will be delivering $700m in revenue in 2020, up 30% and at $350m for the year to date. Operating earnings (EBITDA) guidance of $125-130m implies a minor downgrade to Citi's forecasts, given the translation benefit from a lower Australian dollar in March and April.

The main risk is that customers could reduce expenditure or terminate projects at short notice and there is a risk the investment in sales & marketing could take longer to deliver results. Still, this is a small risk compared with the positive impetus from exposure to large tech companies.

RBC Capital notes Appen is one of the few stocks that have reaffirmed guidance since the onset of the pandemic, which demonstrates the importance of its data annotation services.

This data service is essential for internet search providers, and Appen is a global leader in this field. The increase in search, social media and e-commerce platforms have boosted company's performance substantially.

Ahead of the company's AGM, Credit Suisse downgraded to Neutral, primarily because the share price had rallied close to an all-time high. Hence, an upgrade would be required to support further appreciation and, the broker suggests, in the current environment this may be more challenging to achieve.

Bell Potter believes there is still a reasonable chance the company will upgrade guidance later in the year, potentially at the first half result in August. This could be driven by the underlying performance rather than any change in currency assumptions.

Appen has indicated it is conducting an ongoing review of capital management priorities, including dividends. While making no changes to key assumptions, Bell Potter, not one of the seven monitored daily on the FNArena database, updates the valuation to allow for market movements and time creep. The broker's $30 target and Hold rating are unchanged.

Sales & Marketing

The company has continued to invest in sales & marketing, which is important and suggests upside risk to FY21, UBS assesses. However, this is likely to impact first half margins, Citi asserts, forecasting operating earnings margins to decline to 16.2%.

Margin should subsequently improve to 22.1% in the second half because of strong revenue growth in Relevance, and the increased investment in speech and image allowing for an acceleration in growth amid the beneficial use of the company's Figure Eight platform.

The Relevance division is primarily exposed to work from a large tech organisations, and increasing customer usage and traffic bodes well. The pandemic is expected to have some impact on the speech and image collection work but Citi still anticipates revenue will grow 7%.

Growth will be skewed to the second half and, if there are material contributions from new sectors such as the federal government and automotive, then there is upside to forecasts, the broker adds.

Figure Eight could be affected by the pandemic, although there should be benefits from the annualisation of the acquisition. The main negatives could be the start-ups postponing purchasing decisions and the potential for churn.

RBC Capital, also not one of the seven, has an Outperform rating and $30 target, while there are three Buy ratings on the database and one Hold (Credit Suisse). The consensus target is $31.48, suggesting 2.3% upside to the last share price.

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