Australia | Jul 15 2019
The realisation that Nearmap will accelerate its investment in growth in FY20 and FY21 has provoked some negative revisions to forecasts. Yet brokers are confident in the outlook.
-Current weakness in stock price considered a buying opportunity
-Breaking even on cash flow in FY19
-Expanding into a multi-product operator in location intelligence
By Eva Brocklehurst
Map imaging company Nearmap ((NEA)) is at the front line of an advance on its North American opportunity, yet its market update produced a negative reaction in the stock. Brokers attribute this to several factors, including the realisation that Nearmap will accelerate its investment in growth during FY20 and FY21, which has likely led to negative earnings revisions.
Monetisation of new products and markets provide upside potential and brokers agree the company is in a strong capital position. The company has guided to North American annualised contract value (ACV) of US$22.7m and Australasian ACV of $57.9m, up 19%. Nearmap will report its FY19 results on August 21.
Canaccord Genuity notes exceptionally strong unit economics. Business conditions in Australia have undoubtedly weakened through the second half, however the broker suspects growth was derived from reduced churn and up-selling products, as well as new customer additions.
Following the enhanced investment in growth initiatives, Canaccord Genuity revises up FY20 and FY21 forecasts for ACV by 4% and 10%, respectively, primarily on the back of US growth. This in turn reduces like-for-like FY20 and FY21 estimates for operating earnings (EBITDA) by -45% and -35%, respectively.
Citi reiterates a Buy rating, assessing the current weakness in the stock price as a buying opportunity. Macquarie agrees with this assessment, and considers the FY19 outcome, slightly lighter than expected, is fully reflected in the share price.
The company has furnished its preliminary FY19 numbers but, with only high-level insights, Citi does not know for sure whether volume or price was the primary driver of growth. Assuming gross margins remain flat, this implies churn has continued to fall. The company is intent on capitalising its position in the US, planning a second US office in New York.
In anticipation of ongoing expenditure, Citi lifts FY20 estimates for sales and marketing expenses growth to 50%. This may dampen earnings in the short term but the company will be intent on converting that investment into earnings as quickly as possible, in the broker's view.
Cash flow break-even was achieved in FY19 and year-end cash was $76m. As the company swings from profit to loss in FY20, Citi factors in much stronger investment in the US market.
Nearmap has completed its first capture program in Canada, covering 62% of the population and pre-commitments have been received from existing customers, expected to produce sales in the first half of FY20. Production content expansion has continued, including the launch of 3D online and beta artificial intelligence "Insights".
Accounting Changes
An increase in growth investment and its impact on earnings has been exacerbated by the company shifting to a more conservative accounting policy. Nearmap has re-assessed the amortisation period for capture costs. This is been reduced to two years from five years, in light of the growing need for the most recent imagery, as the company evolves from a single-product aerial imaging business to a multi-product operator in the location intelligence market.
Morgan Stanley notes the more conservative accounting and suspects it may have some impact on the profit & loss statement but, when assessing the company on a cash flow basis, this has no impact on cash earnings estimates. Macquarie assesses customers continue to derive benefits from a large and growing library of historical content and this differentiates the business from its competitors.
While the stock has, historically, been volatile, Canaccord Genuity points out that capital deployed has been highly accretive to shareholders over the medium term. The broker, not one of the seven monitored daily on the FNArena database, maintains a Buy rating and a $3.50 target. The database has three Buy ratings. The consensus target is $4.25, signalling 27.2% upside to the last share price.
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