Citi initiates coverage with Buy recommendation

Citi has initiated coverage of Appen Limited (ASX: APX) with a buy rating and a $5.88 price target. Citi notes Appen is “a global leader in the development of high-quality, human annotated data for machine learning programs. We believe Appen is well positioned to facilitate leading global technology companies in advancements in voice-activated interfaces and improvements in internet search quality.”

APX’s service facilitate client-companies’ technology, and Citi says it expects APX to expand beyond its traditional segments into new areas, including security, automotive and health sectors. Citi also says it expects voice-based human-machine interaction to grow “materially,” and APX’s language resources division should benefit through this.

Citi’s forecast has 2017 financial revenue growing by 40% to $155 million and EBITDA growing by 50% (Guidance: 40%-50%, Consensus: 53%) to $26 million, with APX’s Content Relevance division contributing 90% of the EBITDA uplift (excl. Corp. costs).

Citi notes that APX’s revenues are “primarily based on short term contracts and its top 5 customers represent 88% of revenue,” which they acknowledge as risks, but says they believe long-term client relationships and overall growth of artificial intelligence as medium-term demand drivers.