By Tom Richardson, 12th May 2020
Analysts brushed aside news that Altium abandoned its guidance for full-year revenue of $US200 million ($309 million), saying it remained one of Australia’s best growth businesses.
Altium sells software that helps users design the electronic circuit boards that are common parts of consumer and industrial hardware such as planes, cars, computers, phones and kettles.
Fund manager Sean Sequeira says Altium shares will rise if the market gets confidence it can meet its FY 2025 targets.
Sean Sequeira a portfolio manager at Australian Eagle Asset Management is bullish on its outlook.
“They want to be the hub of electronic design globally, they want to be right at the centre. That can take them to the next level,” he says.
According to Sequeira, COVID-19 will prove a short-term hit to Altium’s long-term growth story. Altium is still targeting 100,000 users by 2024-25 and revenue of $US500 million.
As subscriber numbers grow it can move closer to its goal of creating a network by connecting hardware manufacturers to circuit board designers via its online platforms.
“If they can be the hub of this electronic design software market where everyone, not only the designers, but the manufacturers, parts suppliers, and other users must log on to get information from Altium, it creates the network effect that almost all software-as-a-service companies would love to have,” says Sequeira.
Management blamed the downgrade on weaker subscriber growth as smaller enterprise subscribers delay spending because of the COVID-19 downturn. The shares slipped 3.9 per cent to $35.34 on Tuesday, trimming gains since the end of March to 24 per cent.
Altium’s first-half 2019-20 earning before interest, tax depreciation and amortisation margin of 39.7 per cent would equal $US199 million in EBITDA by 2024-25 for a business valued at about $4.56 billion today.
“If they meet all their targets the stock will double from here,” says Sequeira. “The price is fair now. They’re on the tailwind of a growing opportunity.”
The fund manager argues that Altium is a rare opportunity in the software-as-a-service (SaaS) space, as it’s already highly profitable and pays around 50 per cent of profit in dividends. All this while reinvesting into its technology for the targeted revenue growth.
“How many SaaS businesses in the world are this profitable? Not many. They all go for revenue growth and say the earnings will come afterwards,” says Sequeira.
He references how Altium maintains the rule of 50, where revenue growth plus EBITDA margin must top 50. For example, 20 per cent revenue growth on a 31 per cent EBITDA margin would meet the rule. For investors, strong revenue growth and rising EBITDA margins should translate into profit and capital growth over the medium term.
Sequeira says the rule of 40 is a common standard for software businesses globally, but Altium’s loftier target shows its strength.
It can even be valued on conventional price-to-earnings metrics given its history of growing profitability.
After Tuesday’s guidance update, Goldman Sachs suggested the market had anticipated the near-term risk downgrade risk. Goldman expects revenue to grow to $US194.1 million in 2019-20 with shares selling for 62 times forecast foreign exchange-adjusted earnings of 56¢ per share.
The high valuation is a big risk. Competition, the COVID-19 downturn, or changing customer preferences could hurt investors.
Altium recently launched its Altium 365 online-only software subscription product to promote recurring revenue, scalability, and sales.
“One reason for cloud-based software is that two years ago they put out a trace on their software to find out how many discreet users were using it.
“They found in China they had 100,000 users, but only 1000 were paying,” says Sequeira.
In theory, an online-only product should help prevent designers from using the software without a license due to increased login security. Shifting to the cloud brings other advantages, like the ability to update the software online as the latest demands of designers develop quickly.
Altium has referenced how hardware is to electronics what software is to computer science. It hopes to straddle both sectors as its network becomes a multi-stakeholder-facing hub of electronic circuit board design for hardware manufacturers.
Its software could help solve a global industry challenge as printed circuit boards are used in ever more hardware. This trend will accelerate as internet-connected hardware generally requires more electronic circuit boards.
On Goldman Sachs updated numbers, the shares trade on 37 times FX-adjusted forecast earnings of 94¢ for 2021-22.
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