Altium: A Story About Niche Potential

This story features ALTIUM, and other companies. For more info SHARE ANALYSIS: ALU

-Well positioned in niche market
-Robust growth potential
 

By Eva Brocklehurst

Altium ((ALU)) is a niche player and the name is not widely recognised. The product the company develops ultimately affects everyday modern life but exists in the background, quietly (usually) doing its job.

Moelis has initiated coverage of the stock with a Buy rating. The broker sees the potential for growth to materialise from a number of strategic initiatives the company is undertaking, including the relocation of the head office to Shanghai, China from Sydney, Australia. The reason for this relocation is the belief that China represents the best location for a service-based approach, with a direct relationship with device end-users and manufacturers.

So what does the company actually do? Central is the development and sale of software for the design of printed circuit boards, or PCBs. These PCBs are used in electronic parts from aeroplanes to mobiles. Altium develops the links and tools to assist electronics engineers design their projects. The global market for Altium's niche segment is estimated to be US$700m. Altium is involved in the R&D aspect of the software and spends US$10m each year, or 15% of sales, with an objective to expand the application of the products from mainstream to high and low end use. The relocation to China and increased R&D spending helped push underlying profit to US$20.1m in FY13, a 48% increase. This included 13% increase in sales and an increase in underlying earnings margins to 31.7% from 28.4%. The company has grown recurring subscriptions to be 47% of sales.

Altium was founded in 1985 and listed on the ASX in 1999 – as Protel International. It has evolved its business to provide unified design across all aspects of electronics. Moelis notes the company's product is recognised as the most price efficient available in the global market. Noted customers include heavyweights such as IBM, Motorola, Fujitsu, Philips, Nokia and … Telstra ((TLS)). The majority of sales are outside Australia via a global distribution network. Around 80% of sales are in the United States and Europe, thus there is some currency risk in EUR/USD because of the large proportion of sales conducted in euro.

Competitors include US-based Cadence Design Systems and Mentor Graphics but these companies compete more in the relatively smaller parts of larger operations. The Altium revenue model includes a licence sale and recurring maintenance component. Typically each licence is sold for US$5,500 which compares with the competitor prices of US$10,000 for comparable versions.

Moelis is confident net cash will continue to grow and capex going forward should be minimal, because of the state-of-the-art systems and capacity in Shanghai. The company paid an unfranked final dividend of 8c at FY13 following a 3c interim dividend. The 60% dividend pay-out policy is expected to be maintained going forward and the broker observes the balance sheet has strength to provide acquisition opportunities should they arise. There's no FY14 guidance, but the first quarter sales update indicated a 3% increase. Moelis acknowledges that much of the company's success has been reflected in the doubling of the share price over the past year but the price/earnings ratio is less than 14 times FY15 estimates and hence not overly demanding in the context of a sustainable growth path. The broker has a target price of $3.00.

Examples of the company's products – for those that like that SciFi aspect – include Nanoboard – re-configurable hardware platform to be used for system prototyping, Tasking – an embedded software development tool and Morfik – a design and development tool for web development technology.
 

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