Category: Model Portfolios

Stock:	Appen Ltd
Exchange:	ASX	Symbol:	APX
Date:	05-Oct-22	Latest price:	A$3.29
Market Cap:	$406 m	Fair Value:	A$2.99
Forward DY:	3.16%	Payback (Years):	N/A
Financial Y/E:	31-Dec-22	Rating:	HOLD
Sector:	Technology	Industry:	IT Services
Investment Theme:	Technology	Macro Trends:	A.I.

Summary

Appen (APX) is trading at a discount to our estimate of fair value. Our recommendation is HOLD in the current bear market.

Valuation

We reduced our fair value estimate for Appen (APX) by 74%, to A$2.99 per share, based on the following projections:

• real organic long-term growth of zero (formerly 15%);
• EBITDA margin of 12% (formerly 15%);
• capital expenditure of 5.2% of revenue (formerly 5.4%);
• working capital of 0.4% of revenue (formerly 0.6%); and
• an effective tax rate of 25%.

We selected a payback period of 10 years to reflect the company’s small cap size and a competitive industry.

Business Profile

Appen provides quality data solutions and services for machine learning and artificial intelligence applications for technology companies, auto manufacturers and government agencies. The company’s business segments are Relevance; Speech & Image and Others. Relevance generates the most revenue, providing annotated data used in search technology for improving the relevance and accuracy of search engines, social media applications, and e-commerce. Geographically, the majority of revenue is derived from the USA.

Performance

“Appen’s half year results reflect lower earnings due to challenging external operating and macro conditions, resulting in weaker digital advertising demand and a slowdown in spending by some major customers…” (1H FY22)

FY22 EBITDA margin is expected to be materially lower than FY21.

Capital structure

APX has net cash (after deducting capitalized leases) of $33 million.

Disclosure

Staff of The Patient Investor may directly or indirectly own shares in the above company.