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Altium Performs But Valuation A Sticking Point

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Altium ((ALU)) did everything right in the first half, expanding its subscription base, garnering strong sales and sustaining price improvements. After a very strong result the question is where to next?

Subscriber volumes increased 11% in the half-year while yield growth benefited from price rises. Revenue was up 30% to US$63m. Adjusted for one-offs, operating earnings (EBITDA) grew 45% and the underlying margin improved to 33%.

Excluding FX and acquisitions Deutsche Bank estimates revenue growth was more like 23%, and, of note, the company was also cycling a relatively easier comparable period.

UBS considers the earnings risk is firmly skewed to the upside, as momentum should accelerate in the second half. Recent positive industry feedback signals the AD18 release is likely to drive renewals and conversions from the lapsed subscription pool.

Nexus, the company's collaborative PCB product for enterprise, is showing early momentum and data management revenue has doubled, while the company has signed a large corporate customer. UBS lifts estimates by 5-6% across its forecasts because of margin expansion and revenue upgrades.

Credit Suisse expects higher earnings and upside from new products such as Nexus and the Dassault partnership and upgrades estimates by 7% and 8% for FY18 and FY19 respectively.

China was the highlight for Credit Suisse, although Designer product sales momentum was solid across all regions. Europe/Middle East/Africa (EMEA) was boosted by the move to direct sales in France and the UK.

China delivered revenue growth of 30%, largely because of continued progress on compliance, and the company has opened a new sales office in Shenzhen. Credit Suisse notes the number of active Altium Designer users in China is around 100,000, implying a material opportunity for improving monetisation.

The Americas benefited from an increase in sales capacity, as constraints in that region in the prior corresponding half hampered growth. Credit Suisse suggests volume growth should moderate in the second half.

FY20 Target

If the company can organically deliver on its FY20 target Credit Suisse would increase its valuation to $17 from the current $14. While there is excellent near-term growth and several areas of incremental upside, the broker considers the shares fully valued and retains a Neutral rating.

Management has reiterated FY20 expectations for revenue of $200m and an EBITDA margin of over 35%.

However, Credit Suisse has scrutinised the commentary and suggests the long term target may have been subtly raised. The company has stated that its FY20 target may include a contribution from future acquisitions, yet management has also said, with the current run rate, it will get there organically.

Cash Flow

The main blemish on the result was cash flow, in Deutsche Bank's view, because of a reduction in deferred revenue. Conversion of earnings to cash flow was lower versus the prior year because of a rolling of deferred revenue that related to the timing of subscription renewals. Despite the strong momentum and attractive characteristics the broker retains a Hold rating on valuation grounds.

UBS agrees the only weak spot the result was operating cash flow but is confident an unwinding of working capital should occur and improve cash conversion into the second half.

FNArena's database shows three Hold ratings for Altium. The consensus target is $14.70, suggesting -16.4% downside to the last share price. This compares with $12.90 ahead of the results.

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