Why there could be more upside for Altium

We researched Altium (ASX:ALU) in The Dynamic Investor in January after weakness in the share price saw the 1-year forward P/E multiple hover below the low end of its typical trading range. This occurred despite a trading update issued in November, which showed improvement on several key metrics that underpin the potential for ALU to achieve its long-term targets. With the shares having re-rated since our last report (supported by tech stocks returning to favour), is ALU still an investment opportunity at current levels?

Overview Of Altium

Altium develops and sells software and hardware for the design and development of electronic products. The company has three key products: i) Altium Designer: Software for the design of Printed Circuit Boards (PCBs); ii) Nexus: A collaborative, cloud-enabled PCB design solution; and iii) Octopart: An electronic parts search engine.

The Company sells its products globally, with >95% of revenue generated from outside Australia. ALU is one of the largest providers globally of PCB design software and has an estimated market share of around 25%.

Key Fundamental Drivers

Stronger Revenue Metrics

For the first four months of FY23, ALU generated a higher Average Revenue Per User (ARPU) on PCB subscriptions, as mainstream customers adopt pro-level platform capabilities. As mainstream users are looking to gain access to enterprise features, ALU has been selling enterprise features to mainstream channels, which historically would have required the use of private cloud of enterprise users as a PRO offering via their cloud-based solutions. Growth in the PRO segment helped drive 2H22 monthly revenue per recurring subscriber +18% half-on-half and has continued to contribute to a trend of increasing ARPU.

Further, data on web-traffic to the Altium 365 platform shows strong growth, consistent with management comments of increased adoption. Unique visits to 365.Altium.com for the first four months of FY23 are up 85% compared to the prior corresponding period, which highlights increasing adoption of Altium’s ecosystem tools as part of the PCB-design lifecycle. There is also evidence highlighting a recovery in the supply of electronic components and a moderation of demand from COVID-19-induced peaks. Demand remains ~40% above pre-COVID-19 levels, which is indicative of the supply/demand environment remaining supportive of PCB design activity.

Long-Term Targets Achievable

The Company has previously outlined an FY26 target of US$500m revenue and an EBITDA margin of 38-40%, which ALU had expected would be achieved by reaching 100,000 subscribers by 2026. The Company reiterated this target at its recent trading update.

The achievement of these targets is highly reliant on Altium 365; where the longer-term potential for ALU is that as Altium 365 becomes available to all of its subscriber base, as ALU shifts from a licence model toward SaaS, and from a software product to a platform.

We consider that these targets can be achieved with <100,000 subscriptions given: i) The value proposition of the Altium 365 platform, ii) The stronger uptake of premium tiers of Altium Designer, iii) Digital sales model and iv) ALU’s sticky customer base.

Importantly, the strong revenue trends mean that the Company to achieve the bottom end of its EBITDA margin target of 38-40% by FY25, one year ahead of target. The key reason for this is that the stronger revenue trends are absorbing higher cloud infrastructure costs associated with the strong adoption of Altium 365, as well as inflationary costs for salary and wages.

Strong Balance Sheet

Altium is well positioned to pursue Merger & Acquisition opportunities, given a strong balance sheet position, with net cash as at 30 June 2022 of US$199m (and zero debt), which has been supported by high levels of cash conversion (the operating cashflow to EBITDA of 91% in FY22), as well as the divestment of the TASKING business to a European private equity firm for US$110m in mid-December 2020.

The pursuit of Merger & Acquisitions is a key factor in ALU achieving it long-term target. The Company has previously indicated that ~10-20% of the growth will come from future acquisitions. However, at the FY22 results release, this expected contribution was abandoned. This is indicating that the Company is more confident achieving its targets via organic growth for the electronic design business over the medium term.

Fundamental View

The re-rating in the shares now sees ALU trading on a 1-year forward P/E multiple of ~49x. This is up from ~41x at the time of our report in early January. In contest, this multiple is still at the mid-point of the ~40-60x range that the shares have typically traded on over the past few years. As such, while not presenting as much value at current levels as recently, there may be further upside in the shares over the near-term, with an importantly catalyst being the upcoming interim results release on 20 February.

We also note that ALU retains corporate appeal. This is given the Company’s high-powered Electronics Computed Aided Design (ECAD) offering and transition towards a recurring revenue model (where competitors currently generate a higher level of recurring revenue).

Charting View

After gapping up in late August it then traded sideways to consolidate the move. There seems to be resistance around $39 and ALU is now trying to break above that level and hold. If it can continue to hold in up here, then we can be confident that the consolidation is over and ALU is going to trend to higher levels from here.

Altium (ASX:ALU) daily chart
Altium (ASX:ALU) daily chart


Michael Gable is managing director of Fairmont Equities.


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