Nearmap Entering An Upgrade Cycle

Small Caps | May 05 2021

This story features NEARMAP LIMITED. For more info SHARE ANALYSIS: NEA

Improving economic conditions in the US are benefiting Nearmap, which has now upgraded guidance for FY21

-Strong momentum in North America
-Reinvestment will be required
-Which may push cash burn rate higher


By Eva Brocklehurst

Nearmap ((NEA)) appears to be entering an upgrade cycle, with its improved guidance suggesting the growth profile of its aerial imagery solutions is being de-risked. Brokers assess traction in the US is driving monetisation of the company's R&D program and improving economic conditions will benefit.

Nearmap has upgraded FY21 annual contract value (ACV) guidance to $128-132m, which represents underlying growth of 21-25%. Morgan Stanley notes the upgrade comes ahead of the seasonal peak in June, implying confidence in the outlook. The announcement reflects strong North American momentum where the company has a targeted investment strategy for key verticals.

Canaccord Genuity expects roofing and insurance will be the main drivers in the second half, noting the roll out of the HyperCamera3 system in FY22 is on track. This will improve capture rate/cost efficiency and extend the company's leadership in this technology.

Nearmap expects cash burn will improve in FY21 and be under -$10m although Morgan Stanley notes success in North America will require accelerated reinvestment and raises its cash burn estimate back up to -$13-14m for FY22.

Citi agrees additional investment will accelerate penetration of the North American market and support the company's transition to an insight/analytics provider from simply a content provider.

Long-Term Opportunity

Canaccord Genuity, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and $3.15 target and believes Nearmap is a stock investors should own for the long term, given the substantial growth opportunities.

If the company executes on plan and returns the business to a target of 20-40% top-line growth it should trade on an enterprise value/ACV of around 5x in FY23. Furthermore, the broker assesses this is still a material discount to software peers.

Morgan Stanley interprets the update to imply a return to the target growth rate and also expects leverage in the US will push gross margins towards the level already achieved in Australasia, at more than 90%.

Given the highly seasonal nature of the business, the broker anticipates Nearmap will provide further update regarding momentum ahead of the August result and reiterates an Overweight rating, noting the less mature North American business is driving outperformance.

Citi increases its target to $3.15 to reflect the upgrade, offset by more conservative medium-term forecasts. The broker assesses Nearmap as High Risk based on its quantitative model but does not apply this additional rating because of the strong balance sheet and resilience in the Australasian business.

FNArena's database has two Buy ratings and one Hold (Macquarie, yet to comment on the update). The consensus target is $2.98, suggesting 26.4% upside to the last share price and the targets range from $2.60 (Macquarie) to $3.20 (Morgan Stanley).

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