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Appen Ltd: HY20 Result Disappoints Following A Strong Rally In Its Share Price

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Appen (ASX: APX) is a technology company that develops high-quality, human annotated datasets for machine learning and artificial intelligence including speech, text, image and video. Appen partners with leading technology, automotive and eCommerce companies - as well as governments worldwide - to help them develop, enhance and use products that rely on natural languages and machine learning. Appen’s market capitalisation is A$2.2 billion.

 

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What are the key features of the HY20 result?

Appen reported growth in HY20 revenue of 25% to $306.2 million and underlying EBITDA of $49.1 million, a rise of 6%. Appen noted that COVID-19 had no material impact of its business operations.

The Relevance Division (which provides annotated data used in search technology for improving relevance and accuracy of search engines, social media applications and e-commerce) continues as Appen’s growth engine with revenue up 34% to $273.9 million. Revenue for the Speech and Image Division (which provides annotated speech and image data used in speech and image recognisers, machine translation, speech synthesisers and other machine-learning technologies) was $31.9 million. This was down 20% compared to the first half of 2019 but was up on the second half 2019, reflecting the inherent cyclicality of major programs.

Figure Eight, which was acquired in April 2019, is almost fully integrated into Appen’s business and is delivering on Appen’s strategic thesis. In particular, four of the five major customers are now using Appen’s annotation platform and Appen has signed an enterprise-wide platform agreement with one of them that included an US$80 million annual commitment. This increased Appen’s total annual contract value at 30 June 2020 to US$103 million.

Appen has $126 million in cash at 30 June 2020, is net debt positive and cash conversion of 154% of underlying EBITDA. Appen will pay an interim dividend of 4.5 cents per share (50% franked), up 12.5% from 1H19.

What is the outlook for Appen?

Appen maintained its FY20 guidance which is based on year to date revenue plus orders in hand for delivery of approximately $475 million at August 2020. Appen continues to expects full year underlying EBITDA for the year ending 31 December 2020 to be in the range $125 million-$130 million (assuming an average $US/$A exchange rate of US$0.70 for the August to December 2020) and full year underlying EBITDA margins at high teen percentages.

What is the market’s reaction to the HY20 result?

Appen’s share price fell 13.4% to $37.60 (27 August 2020) on the announcement of the HY20 result. This suggests that the market was disappointed that the HY20 result did not exceed guidance. However, Appen’s share price has increased strongly since the low of $15.70 in March 2020 which implies that the market got ahead of itself. Appen trades on a forward PE ratio in the low 80s and a dividend yield of 0.2% (partly franked). This means that the market continues to expect strong growth earnings in the short to medium term.

 


 

Disclaimer:

This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law, we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.
ASR has no position in any of the stocks mentioned.

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