$9 price target, page-2

Here's a small excerpt from Morgan Stanley's research on ACX

Price Target A$9.30

Aconex Plain Speakin' Hits Home

Clear FY17 guidance and FY18-19 growth and margin profiles set a positive tone at the AGM. ACX also reiterated that cash collection will exceed revenue in the long term; 1Q cash collections were solid. Conject and EMEA clearly disappointed, but the added clarity should prompt a re-rating.

Earnings certainty: ACX was a stock under immense pressure going into the AGM, off 31% from its July 25 high (vs. -2% for the ASX 200) and with record short interest. Thus, management's message was always going to be scrutinised. ACX was on the front foot, providing FY17 revenue and EBITDA guidance, FY18-19 revenue growth and margin guidance, and clear explanations of cash flow. The net result is consensus estimate upgrades on lower revenue.

How much was FX? FX is responsible for A$5.8m of our A$8.4m cut to FY17e revenue. Conject and EMEA make up most of the rest. We cut EBITDA by A$3-4m (9-13%) in FY17-18e and cut our PT to A$9.30. The big shift is in the sales line. We highlight that yoy GBPAUD depreciation is 24% assuming actuals YTD and spot for the remainder of FY17. EUR has also depreciated >4%.

Conject disappoints: Against a backdrop in EMEA of uncertainty around the UK's decision to leave the EU and falling oil prices, Aconex reported a broader lack of client will to make purchasing decisions, accounting for some of the EMEA softness. Also, the acquisition and perception of change appears to have had a material impact on Conject's existing pipeline of new business opportunities. ACX reports that this pipeline has largely been restored (for Aconex product rather than Conject), but the 1Q17 softness was clearly a negative surprise.

Cash flow clarity: ACX confirmed our thesis on cash conversion, specifically guiding that once the removal of discounts for upfront payments has washed through, "cash collection is expected to realign and track ahead of revenue." It highlighted that upfront invoicing dropped from 27% immediately before the IPO to 17% in FY16. We expect cash flow conversion to fully normalise in FY19.

Reiterate OW – high-conviction pick: We calculate ACX's TAM at >US$8bn. It offers high growth and predictability – very few Australian companies give multi-year guidance, but ACX is guiding for a 20-25% organic revenue CAGR over FY-17-19, and 17-22% EBITDA margins in FY18-19. Vertical SaaS comps globally highlight the true mature EBITDA margin potential as well north of 40%.