Appen Highlights Lift In Order Book

This story features APPEN LIMITED. For more info SHARE ANALYSIS: APX

Appen has upgraded earnings guidance and indicated a solid order book exists for 2019.

-Expanding sophistication of its artificial intelligence offering
-Further upgrade to 2019 may be forthcoming
-Figure Eight potentially a material source of earnings upside
 

By Eva Brocklehurst

Brokers expect customers of Appen ((APX)) will obtain higher-value data as the business expands its sophistication and efficiency. The addition of the crowd management platform of LeapForce and newly-acquired Figure Eight's client portal underpin this view.

The company, which provides data for machine learning and artificial intelligence, has updated 2019 guidance at its AGM, expecting underlying operating earnings (EBITDA) of $85-90m, including the Figure Eight acquisition.

This is an upgrade of 8-9% on the implied range provided at the time of the acquisition in March. As assumptions have not changed (a loss of -$4-6m is forecast for Figure Eight in 2019) this improvement appears to Bell Potter to have been driven by the operating performance in the core operations. Whilst not completely clear, UBS also assesses the guidance includes the $6m investment in technology that is now being spent across other areas of the business.

Order Uplift

The company also indicated that year-to-date revenue, plus orders in hand for 2019 delivery, is $270m, signalling to brokers full year revenue will be over $500m. While this now comprises the contribution from Figure Eight and cannot be directly compared to the $165m for 2018 reported in February it does appear to Canaccord Genuity to represent a healthy uplift in core orders. Either that or a dramatic increase in Figure Eight's recurring revenue.

The broker upgrades estimates to the top end of the guidance range, a 7% increase on previous forecasts. 2020 and 2021 estimates are increased by 6%. Canaccord, not one of the eight stockbrokers monitored daily on the FNArena database, upgrades to Buy from Hold with a target of $29.50.

Canaccord acknowledges a long period with a Hold rating, having been concerned that the expanded earnings multiples could revert to the mean and take the stock price down. However, Appen appears to have retained earnings momentum with positive elements such as this upgrade to guidance for 2019.

Bell Potter forecasts earnings to be above the guidance range, at $93.7m, driven partly by currency. Hence, a reasonable chance of another upgrade can be factored into the second half of the year. The broker, also not one of the eight, maintains a Hold rating with a $25.75 target.

UBS asserts the company is leading the market, while its position has been strengthened with the added capabilities from Figure Eight. Earnings risk is skewed to the upside and the broker considers Appen a strong domestic exposure to global artificial intelligence trends.

UBS maintains a Neutral rating on valuation grounds with a target of $26.20. The broker believes the company's strong language capability should also enable Figure Eight to capture larger scale projects. Figure Eight's video annotation capabilities lead the market and could be a material source of earnings upside in the medium term for Appen.

FNArena's database shows one Buy (Citi, yet to update on the AGM) and one Hold (UBS).

See also, Appen Enhances Scale With Figure Eight on March 12, 2019.

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