James Dunn’s favourite ‘real’ tech stock
One of the most popular thematics on the Australian share market is “tech” – but the term is often applied as a misnomer. Many of the so-called “tech” stocks are arguably more technology-enabled than businesses built on technology. Here are three of what I regard as some of the ASX’s best “real’ tech stocks, each offering what looks to be good share price value.
1. Computershare (CPU:ASX)
Market capitalisation: $7.9 billion
Three-year total return: –1.6% a year
One-year total return: +40.5%
Forecast FY22 yield: 2.8%, 65% franked (grossed-up, 3.6%)
Analysts’ consensus valuation: $16.36 (Thomson Reuters), $15.86 (FN Arena)
One of Australia’s first start-up technology companies, Computershare has grown to become the largest share registry hosting business in the world, and is also a major player in transfer agency, employee share plan administration, proxy solicitation, class action administration, stakeholder relationship management and communications, corporate actions, mortgage services and company compliance tools.
Its global scale helps Computershare specialise in handling global financial governance and large and complex transactions such as takeovers, particularly when there is an intricate cross-border angle. The company describes itself as a technology-enabled administrator to legal titles and financial assets – the keeper of the “truth,” and the verifier of the digital trail, in millions of financial transactions.
This month, Computershare extended its move into the US corporate trust business, which it entered four years ago, buying Wells Fargo Corporate Trust Services for $US750 million ($986 million). The acquisition, which is subject to regulatory approvals and “customary closing conditions, makes Computershare one of the largest corporate trust services businesses in the US.
The company’s core services offer highly resilient recurring revenues, and high margins – on top of its technology providing the services, CPU generates margin income from cash it holds on behalf of its share registry clients, before dividends and other distributions are paid to the clients’ shareholders. This aspect of its business means that higher interest rates benefit Computershare.
For the six months ended 31 December, the company reported a 3.2% decline in management revenue to US$1.1 billion and a 52.4% slide in margin income, to US$55.2 million, resulting in net profit falling 25% to US$117.8 million and earnings per share (EPS) falling a similar percentage, to 21.8 cents per share. Despite the earnings slump, CPU maintained its fully franked interim dividend at 23 Australian cents per share.
In US$ terms, analysts (according to FN Arena’s collation) expect earnings to grow by 18% in FY21 and by 7% in FY22, but with a dividend trimmed in both full years. But analysts allow for share price gains that imply that CPU is quite good value at current prices.
2. Appen (APX:ASX)
Market capitalisation: $1.9 billion
Three-year total return: 19% a year
One-year total return: –32.5%
Forecast FY22 yield: 0.9%, 50% franked (grossed-up, 1.1%)
Analysts’ consensus valuation: $21.00 (Thomson Reuters), $22.23 (FN Arena)
Appen is another Australian global technology leader, in its case in the development of high-quality, human annotated datasets for machine learning and artificial intelligence (AI). Appen creates the data that goes into the machine learning models of many of the biggest tech companies in the world. Appen has been hit by the recent rotation out of high price/earnings (P/E) ratio “growth” stocks – from a record high of $43.66 in August 2020, Appen has been slashed in value by almost two-thirds. This wasn’t just based on a change in investor perception: earnings downgrades and resultant broker share-price-target cuts, and the ongoing effect of COVID-19 – which cut into new business development and clients’ online advertising spending, and deferred several major contract renewals, were also real-world causes.
For 2020 (Appen is a calendar-year reporter), revenue rose by 12% to $599.9 million, underlying EBITDA (earnings before interest, tax, depreciation and amortisation) increased 8% to $108.6 million, and statutory net profit grew by 23%, to $50.5 million. However, underlying net profit was much less impressive, eking out growth of just 1%, to $64.4 million. That didn’t cut the mustard with investors.
Appen’s guidance for 2021 has EBITDA increasing by a range of 18% to 28%, to between $120 million–$130 million, which implies that management is feeling optimistic. The company reminded the market that it has $78 million of cash, no debt, and a track record of delivering growth. Whether or not the market is now pricing-in a slower recovery, the APX share price now represents a trailing P/E of just over 40 times earnings, and a 2022 forecast P/E of less than 25 times, which is extremely cheap for APX. Yes, Appen has disappointed investors who bought it on the way up into the $40 levels, but the long-term need for training data for use in AI, and all of the applications that AI goes into, is huge. I think you can back Appen as a core technology holding – and at bargain prices.
3. Altium (ALU:ASX)
Market capitalisation: $3.7 billion
Three-year total return: 14.3% a year
One-year total return: –6.3%
Forecast FY22 yield: 1.7%, unfranked
Analysts’ consensus valuation: $33.82 (Thomson Reuters), $33.90 (FN Arena)
Electronic printed circuit board (PCB) design software company Altium is also one of the ASX’s genuine global tech stars – but like Appen, the stock has been stripped back from levels above $40 in August last year, in a puncturing of high (60-plus) P/Es. But the investment case remains – Specialising in PCB design software means that Altium’s products are deeply embedded in the profound technological shifts that society and business are experiencing, in the rise of forces such as cloud computing, big data, artificial intelligence (AI) and 5G. The PCB is at the heart of the burgeoning use of “smart” connected devices in everyday life – Altium says it is “committed to achieve market leadership to the point of being the dominant provider of PCB design software by 2025.”
Altium disappointed the market with its first-half result (December 2020), in which continuing operating revenue weakened by 4%, to US$80 million, and higher expenses (due to COVID-19) resulted in a 15% fall in EBITDA, and a 23% slide in pre-tax profit, to US$20.7 million. Moreover, the return on equity (ROE) has halved since June 2019, to about 16%. Following the result, some analysts have had issues with recent discounting of some of Altium’s licences, which they fear could imply that market conditions are weaker than anticipated.
But Altium is in a strong financial position, debt-free and with US$88.3 million of cash in the bank at the start of 2021. And it has a clear pathway to further global growth, based on Altium 365, its cloud-based platform that enables multiple users to collaboratively work on a single project in real-time. Full-year revenue guidance is at the lower end of the range, from US$190 million to US$195 million, and the company’s ambition to “dominate and transform its industry” remains intact: despite the COVID-19 impact in 2020, Altium still aspires to achieve US$500 million of annual revenue and have 100,000 subscribers over the next four or so years, compared to 52,157 at December 2020.
Right now, Altium appears to offer pretty attractive value – again, taking advantage of a stock that has been, arguably, over-punished in the last eight months.