Altium Primed For High Growth

This story features ALTIUM. For more info SHARE ANALYSIS: ALU

-Strong balance sheet
-Acquisition growth potential
-Expanding market
-High barriers to entry
 

By Eva Brocklehurst

Altium ((ALU)), the printed circuit board designer, is primed for high growth. The company has set a target of achieving US$100m in revenue by FY17 amid plans to develop the necessary tools to expand its addressable market.

Deutsche Bank takes up coverage with a Buy rating, while Bell Potter also upgrades to Buy from Hold. Deutsche Bank's view is based on a scalable, cash generating business which is exposed to highly attractive industry dynamics. Altium provides circuit board design software which is used across the electronics, automotive and aerospace industries. It is the fourth largest in this field, globally, with a 10% market share. The company's major geographies include the US and Europe, which contribute 80% of sales collectively.

Bell Potter upgrades because the total expected return is now over 20% and, given there is no change in forecasts, the recommendation is solely driven by valuation. The broker notes the company may not produce sales figures for the June quarter, as it has signalled it intends to discontinue quarterly reporting. If it does indeed release the data and guidance, in order to round off the current financial year, then the broker considers that could well be a likely catalyst for the share price, given FY15 forecasts for growth of 33% and 43% in earnings and profit respectively.

Another potential trigger is an acquisition, which Bell Potter suspects may occur in FY16. With a cash balance of US$62m the company is well positioned for such a move if it can find a suitable proposition in coming months. The broker prices in a 10% premium in its target of $5.50 for an acquisition.

Deutsche Bank also believes Altium is well placed to capitalise on any market opportunity, boasting a significant subscriber base and a strong internal development capability. Growth channels include expanding the analysis tools segment, new products and acquisitions. The main concern for Deutsche Bank is the sustainability of the margins the company enjoys. This is particularly the case with regard to the company's intention to expand into the upper end of the market, which will required increased investment in research & development and marketing.

Given subscriptions contribute around 50% of revenue, the need to retain customers over time is important to sustaining growth. Deutsche Bank notes renewal rates in the developed pool are around 85% while materially lower in the underdeveloped regions, such as China and Russia, at around 30%. The issue in China centres on the high level of piracy. Current sales models are geared towards monetising the pirated use of software via policing infringements and/or the provision of additional services.

As a result of higher cost intensity the margin profile is less attractive in the underdeveloped regions compared with other areas. The broker notes this is also partly a function of less attractive re-seller agreements. Still, a change in attitudes and legal remedies are required for the greater China region to become a material contributor to earnings.

The barriers to entry into Altium's market are significant, given the investment required to develop the intellectual property. The major risk, in the broker's view, comes not so much from a new entrant but rather the company being overtaken by new technology or R&D expenditure turning out to be uneconomic.

Deutsche Bank initiates with a $5.50 target, observing that while the company is trading at an elevated FY16 multiple, this is distorted by the capital raising in the first half as the proceeds have not yet been deployed. Using ungeared multiples, given the strong balance sheet, the company is trading on 17.7 times FY16 earnings estimates, broadly in line with domestic peers.
 

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