Strong Growth Heading Altium’s Way

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

-Opportunities to drive scale
-Strong earnings growth expected
 

By Eva Brocklehurst

Circuit board designer Altium ((ALU)) has turned around. There are some big growth numbers heading the company's way and brokers are increasingly confident the company can perform.

Moelis has set a Buy rating and $3.00 target, noting that despite an 80% increase in the share price over the past year, FY15 multiples are undemanding in the context of sustainable growth per annum of over 15%. A 45% underlying profit increase in the first half was indicative of the scale that will come from top line growth opportunities in a global niche market segment. Altium targets the mid tier of the global printed circuit board (PCB) design market, which Moelis observes is worth US$500m within a total market of US$800m, of which Altium has a 10% share. This share is growing because of a lower priced product with comparable features to competitor offerings.

It wasn't always this way. The company has endured four years of either negative or low earnings because of a number of one-off items including restructuring, share-based payments and an onerous lease. These issues have now been dealt with and the outlook is strong for both revenue growth and margin expansion.

Bell Potter has initiated on the stock with a Buy rating and $2.75 target and bases its investment case on the company's position in the top five in the PCB design market. PCBs are integral to electronic parts, the broker notes, and Altium develops links and assists designers of electronics to manage their projects. Bell Potter expects earnings growth of 508% in FY14, 26% in FY15 and 29% in FY16 and now expects a much narrower gap between reported and underlying earnings. The broker's forecast dividend for FY14 is 12.5c, suggesting a yield of 5.7% on earnings estimates of US$15m. For FY15 that forecast extends to a 13.5c dividend and a yield of 6.1% on earnings estimates of US$18.7m.

The March quarter showed the company has significant growth opportunities with primary regional drivers being Europe and the Middle East as well as China, where the CEO, Aram Mirkazemi, is based. Moelis observes the trend in the Americas is also improving, contributing 40% of sales in the March quarter. The reseller model has now been restructured in the US. Moelis also expects R&D spending will be relatively stable, at around US$10m per annum. Bell Potter also likes the potential upside from expanding into new markets. Management is focused on developing a new product suitable for the top end of the market segment, in order to increase market size and growth potential. This product development is expected to be completed in FY15. The company is also releasing new products into the low end or the market.

Bell Potter assumes only modest revenue from new products, with potential upside to forecasts should the product releases be more successful than assumed. The broker also notes the company is at a point where it can grow revenue without having to increase expenses by a similar percentage, so over the medium term margin improvement is expected. Key risks centre on FX fluctuations as the majority of sales are in US dollars or euro, while the majority of costs are in US dollars. There is always the risk that new technology will make the company's products less competitive but at present PCBs are holding the floor.

The corporate structure of the company has evolved with the high percentage of sales in offshore markets. Founded in 1985 as Protel, originally, the headquarters were in Sydney but then moved to Silicon Valley in the US in 1990. Headquarters were then moved back to Sydney in 2001, when the company's name changed to Altium. Main operations are in Sydney and Shanghai with R&D in Ukraine, the Netherlands and China.
 

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