Significant Expansion Underway At Aconex

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-Unique mobile features
-Large global clientele developing
-Ability to reinvest in network
 

By Eva Brocklehurst

The information management company Aconex ((ACX)) has established a short but impressive track record since its listing last year, winning several major contracts across its key area of focus, the construction and engineering industry.

Recent agreements with Lend Lease ((LLC)) and John Holland are expected to significantly expand its position in both the domestic and international markets. Paper based systems are still the norm in most cases and Aconex allows for greater collaboration across building and engineering projects in digital form. The company's technology boasts strong mobile features which differentiate it from competitors and domestic software comparables.

Morgan Stanley has added the stock to its coverage and expects Aconex will become a global leader in this large market as its platform is strong and there are structural tailwinds which remain supportive. The company is also envisaged as having a differentiated ability to reinvest where network and scale matter. Given the collaborative nature of the product, Morgan Stanley expects only a small number of operators, perhaps 1-3, will come to dominate the segment.

The value proposition is strong. The broker believes that in servicing a vertical market such as construction, within a few years every major developer, engineer and architect will have used Aconex. The broker forecasts the company will grow its sales at a 24% compound rate until FY23, reinvesting along the way to build more functionality, sales and support. Despite reinvestment costs, Morgan Stanley also envisages earnings margins reaching the high 30% levels. The company's growth profile appears similar to other verticals in this segment which trade at a premium to Aconex but often do not have the same competitive advantage.

Both Macquarie and UBS consider the company now has the scale to grow earnings significantly. Macquarie believes the contracts with Lend Lease and John Holland consolidate the company's position as the "industry standard" in Australia. Australian users are more similar with the platform and require less training and support. The deal with John Holland will also allow an opportunity to partner with a subsidiary of China Communications Construction, currently ranked as the world's fourth largest global contractor. 

Bechtel, the largest civil engineer in the US, first started using Aconex during construction of the Antapaccay copper mine in Peru and the Salalah Airport in Oman. Macquarie expects Bechtel will become one of the company's largest and most influential clients. Morgan Stanley is still unsure whether the rest of the global industry will follow suit and urges caution with regard to assumptions. The industry is only lightly penetrated at present, at around 4.0%.

Aconex intends to capitalise on longer-term growth opportunities with increased investment in sales and marketing. Macquarie recently reduced FY16 and FY17 estimates to allow for this investment but upgraded assumptions longer term, noting future growth will be driven by a networking effect. UBS notes the company's revenue is tracking ahead of prospectus, reflecting the recent contract wins. The first half accounted for the majority of the increase on prospectus forecasts, with the broker noting increased sales costs and development expenditure in the second half. UBS still expects revenue growth to accelerate and recently increased forecasts for FY16-18 by 6-9%.

On FNArena's database there are three Buy ratings. The consensus target is $3.78 which suggests 3.2% downside to the last share price. Targets range from $3.41 (Macquarie) to $4.40 (Morgan Stanley).

See also, Aconex Puts Early Runs On The Board on February 23 2015.
 

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