Bell Potter Price Target $11

BELL POTTER published date 24/4/18

12 month Price Target: $11.00

Expecting a reasonable if not positive update at AGM
Appen has its AGM next month and we expect the company will provide a reasonable if not positive trading update for the year thus far. Appen has upgraded its guidance at or around the AGM in each of the last two years and, while we do not rule out an upgrade to the guidance this year, we more expect the company to reiterate the already strong forecast growth it provided at the release of the 2017 result in February. This, in our view, would still be well received by the market given there may be some concern that purchase orders from its largest customer, Facebook, have been negatively impacted by the recent data scandal but we do not believe this to be the case. There is, however, the potential for a “soft upgrade” in our view where the company may narrow the guidance range towards the top end given the currency is working in its favour. That is, the current 2018 EBITDA guidance range of $50-55m assumes an AUD/USD exchange rate of 0.80 which is above the ytd average of around 0.78 and we estimate the sensitivity of a one cent move is around +/- $1m.

No change in forecasts
There is no change in our forecasts. Our 2018 forecasts are consistent with the company’s guidance range albeit we are already towards the upper end. We note, however, that we forecast particularly strong EPS growth in both 1H2018 and 2018 of 80% and 125% which should be well received by the market. We also forecast strong double digit EPS growth in 2019 and 2020 of 20% and 15%.

Investment view: Maintain BUY, PT $11.00
We maintain our BUY recommendation and $11.00 price target on Appen. We only recently updated out PT on Appen and, with no change in our forecasts, there is no subsequent change. Our $11.00 PT equates to a 2019 PE ratio of c.28x which is within the 25-30x range we believe is appropriate for the company. We acknowledge Appen is not a software company but believe a software-like PE ratio is appropriate for the company given its exposure to the AI market, the strong customer relationships and the concentration of suppliers in the market in which it operates.