APX Charts, page-1616

@chad987,

Running a sensitivity analysis on Appen using a DCF model -- I arrive at the following:


The two main variables I am playing around with are:

• Growth (top line CAGR across the 2020-30F forecast period)
• Terminal EBITDA multiple

Across each scenario, I've held everything else constant:

• A corporate tax rate of 30%
• A weighted average cost of capital (WACC) of 9.9%. [This is based upon a cost of debt calculation that reflects i) the risk-free rate, ii) the country risk premium and iii) the sector’s (technology) specific cost of borrowing]
• Annual inflation rate of 2.40%
• Assumed total shares on issue remains constant at 122.35M
• Assumed the underlying EBITDA margin rises gradually (linearly) to 21% by 2030F (across 2015-2019, the EBITDA margin has ranged from 16% to 20%) [I think this is a very conservative assumption]
• Assumed the EBIT margin of 11% in 2020 rises gradually (linearly) to 16% by 2030F (across 2015-2019, the EBIT margin has ranged from 12% to 16%) [I also think this is a very conservative assumption]

What does this tell us?

• The market is currently valuing Appen as if it is likely to grow at a compounded annual growth rate (CAGR) of somewhere between 5-10% over the next decade. For example, a 10% annual growth rate across the next decade, with a 15x terminal EBITDA multiple leads to a fair value of circa $20.86 per share
• The industry is projected to grow at between 24% and 28% CAGR, so by buying Appen at current prices, in my view, one has a significant margin of safety.

On the 23.07.2020, I sold my Appen holding at $37.26 to lock in profit (see here: https://hotcopper.com.au/threads/ann-notification-of-earnings-release-and-conference-call.5495223/page-10?post_id=46038349).

I'm very grateful that the (irrational) market has given me this chance to rebuild my position at extremely low prices; it is the largest holding in my portfolio.

T.E.P.