Australia | Feb 16 2021
This story features ALTIUM LIMITED. For more info SHARE ANALYSIS: ALU
Risks implied in second half forecasts suggest Altium is not completely out of the woods, although longer-term growth appears solid
-Set to take advantage of renewed confidence as vaccines roll out
-Margins likely to remain under pressure until FY23
-Flight Path outlook assumes 10-20% from future acquisitions
By Eva Brocklehurst
Software designer Altium ((ALU)) is experiencing an improvement in customer confidence, although with the pandemic yet to come under control across the globe brokers are wary that accelerating momentum in earnings and better margins could be some time away.
While FY21 guidance has been retained at the lower end of the former range, with revenue of US$190-195m and operating earnings of US$70-76m, a large acceleration is required in the second half, Credit Suisse points out.
There are improving signs from customers and company specific drivers, such as reduced discounting and a reorganisation of sales, but the broker did not find enough incrementally positive news to be completely comfortable and suspects risks may well weigh on investor sentiment. Over the longer term, nevertheless, the growth outlook appears solid and M&A is also likely to feature.
The business is exposed to high levels of non-recurring sales that underscores the cyclical nature of the stock, and therefore headwinds such as the pandemic are meaningful.
Credit Suisse attributes a weak first half to the pandemic and believes the business is well set to take advantage of the roll-out of vaccines over 2021. Citi agrees new business will improve over 2021 as the vaccine rolls out and demand becomes more settled, particularly among small-medium enterprises. The broker awaits further details on the FY25 targets post the sale of Tasking.
UBS places forecasts at the lower end of both revenue and operating earnings guidance, noting the skew for earnings implied for the second half is 56-57%.
Still, the broker also observes some tailwinds, such as pent-up demand that is likely to return as business confidence improves. Significant discounting occurred in the second half of FY20 and first half of FY21 and a return to more normal pricing levels should also occur.
UBS remains confident in the company's product leadership as well as the upside from long-term aspirations, upgrading to Buy from Neutral.
Moreover, the balance sheet should allow Altium to take advantage of M&A opportunities in the medium term. The adoption of Altium 365 has accelerated, with 4500 companies and 9400 active users on the platform, up 83% on the prior corresponding half.
As a result, UBS expects there will be a modest impact on revenue in the short term but a reduction subscription lapse rates. The company remains confident in the aspirational target of US$500m in revenue and 100,000 subscribers. A recurring revenue outlook of 80% is maintained for FY25.
Furthermore, there is upside to this target, in the broker's view, via the accelerating momentum in China along with a more automated sales and a subscription platform that should drive lower churn. Catalysts also exist in the commercialisation of the relationship with Dassault.
Macquarie assesses future margins will remain under pressure before turning around in FY23. The company expects FY21 margins of 37-39%, which implies a material pick-up in the second half.
A combination of both operating improvements as well as an acceleration in earnings as the pandemic eases is likely. Yet Macquarie has limited confidence that margins will rebound materially over that time frame.
The 2025 Flight Path strategy is guiding to a declining earnings margin trend until FY23 and, while this may well be the path to longer-term profitability, Macquarie believes investors will require further data regarding Altium's ability to transition to a cloud-based platform.
Hence, there are limited catalysts to justify investment on the basis of a margin turnaround that may be two years away. The revised Flight Path outlook, significantly, now assumes 10-20% from future acquisitions, which Morgan Stanley considers a negative as it entails a step up in risk.
There are three Buy ratings and three Hold on FNArena's database. The consensus target is $33.33, suggesting 13.8% upside to the last share price. Targets range from $30 (Macquarie) to $37 (Morgan Stanley).
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