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Is APX A Good Investment At This Price?

  • May 18, 2019 10:15 AM AEST
  • Team Kalkine
Is APX A Good Investment At This Price?

Appen Limited (ASX: APX) is engaged in the business of services for machine learning and artificial intelligence applications for global technology companies, government agencies and auto manufacturers along with provision of quality data solutions.

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The company recently released its Annual Report for FY18. Total revenue for FY18 stood at $364,289k as compared to $166,571k in FY17, driven by the significant growth witnessed by Content Relevance division. Looking at the segment performance, the Language Resources division posted a pcp growth of 27% (CC: 25%), led by higher volumes from the technology sector, particularly in the second half of FY18. The Content Relevance division recorded a pcp growth of 148% (CC: 140%), driven by the Leapforce acquisition and higher scope and volume from major customers as well as revenue from new customers.

Group’s performance and benefits for shareholder wealth (Source: Company Reports)

Statutory EBITDA (including transaction costs of $1,507k and share-based payment expenses of $1,666k relating to the Leapforce acquisition) for the company stood at $68,080k, representing a growth of 206% (CC: 190%) over FY17. The underlying EBITDA margin at 19.6% in FY18, is higher as compared to 16.9% in FY17, underpinned by the scalable and successful delivery of the top line growth. The higher margins do not reflect any synergies from the Leapforce acquisition, which are likely to be visible in 2019. The management plans to reinvest these synergy savings back into the business in the form of engineering infrastructure and capability. This will build platforms and tools to further enhance APX’s competitive positioning as a world leader in the provision of data annotation services and products.

The ‘Language Resources Division’s return on sales declined to 21.8% against 30.1% in FY18 on the back of adverse impact on customer mix by a significant reduction in a complex value-added government work. Lower operating margin can be considered as a timing issue, not structural. However, the planned strategic focus on increasing the revenue pipeline in the technology was a success, which resulted in significant growth in sales and the bottom line in the second half.

The ‘Content Relevance Division’s return on sales at ~24% saw a substantial increase as compared to the return of 17.6% in 2017. The higher return can be attributed to the continued improvement in gross margin, which was achieved on the back of operating scale efficiencies and economies as well as a contribution from Leapforce earnings. For the full year, it is not possible to split out the profit participation from Leapforce due to it being combined with Appen; however, Leapforce contributed 129% of the 217% EBITDA growth for H1 FY18 as compared to H1 FY17.

The impact of currency fluctuation on the revenue and EBITDA resulted in a reported growth being higher than real growth. Growth over the previous year in CC (constant currency) was 7% less revenue growth and 12% less underlying EBITDA growth as compared to the reported revenue.

At the current market price of $25.190, the stock is trading at a price to earnings multiple of 61.83x as on 17th May 2019. The 52-week high and low range for the stock comes in at $26.03 and $9.58. Looking at the historical price performance, the stock has generated significant returns of 148.92% in the last one-year. Currently, the stock is trading at close to its 52-week high level. Higher valuations also provide some discomfort for the investment at the current juncture.


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