Treasure Chest | Mar 08 2016
Moelis analyst Garry Sherriff has met with management of ASX-listed Appen (APX), crunched the numbers afterwards and concluded there's a real chance market consensus is currently falling 10% short of the company's growth expectations for fiscal 2016.
Amongst the take-away snippets Sherriff brought home from the meeting are:
– Over $60m purchase orders in hand already for 2016 with 10 months still to go. Orders in hand only includes the Microsoft contract up until renewal date at 30 June and not beyond (clear upside if they renew and they have renewed each year for the past 6 years)
– Management guided to low double digit sales growth in 2016 but less than underlying FY15 growth (+35%). According to Sherriff, this implies somewhere between +10-35% in CY16, midpoint is 20% growth or $99m vs $96m consensus at 15% consensus growth.
– Management guided to low double digit underlying earnings growth but less than CY15 growth (+85%). Sherriff notes consensus is only forecasting 15% growth, which seems too conservative given the operating leverage through continued revenue growth given work in hand only 2 months into the year.
– Management also acknowledged margin pressure from competitors and project ramp-ups. Sherriff notes the company achieved 19.1% EBITDA margins in 2H15, but consensus has CY16 margins at 16.6%, implying significant softening in margins despite ~20% revenue growth.
Putting one and one together, the conclusion from all of the above is this company is cum upgrade and analysts will have to lift their projections. Moelis currently does not cover this stock.
States Sherriff: conservatively assuming margins fall from 19.1% 2H15 to 18.0% for CY16, would see more than +10% upgrade to consensus.
Appen started life in 1996 but only listed on the ASX in early 2015. The company is specialised in speech recognition software and search engine optimalisation. Its sales are primarily in the USA.
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