Date : 29/09/2020

Altium Limited

ASX :

ALU

Market Cap : $4.60 Billion

Dividend Per Share : $0.27

Dividend Yield : 1.1 %

Buy

52 Week Range : $23.11 - $42.76

Share Price : $36.48

A growing business with favourable long-term macro conditions. It comes with good financial health and solid past performance. We recommend to "Buy" at this price.

Company Analysis

Altium Limited (ASX: ALU) is a software giant that provides designer software for electronic products. Engineers use Altium’s software to design printed circuit boards. Altium is the global leader in its industry. The firm offers the below products:

  • Altium Designer – A complete environment for schematic + layouts.
  • Circuit Studio – An entry level professional PCB design tool.
  • Circuit Maker – A community-based PCB design tool.
  • NEXUS – Agile PCB design for teams.
  • Altium 365 – A cloud-based platform that connects PCB design to manufacturing.

PCB’s has diverse applications. Anything that is electronic in nature, needs a printed circuit board. From Tesla to Amazon to Google, Altium’s customer base is certainly high-profile.

Altium 365 is the world’s first digital platform for designing electronics hardware. The product was launched in May 2020 on a subscription model and it already has over 5,000 active users. The software is being pushed by Altium to completely move into a SaaS based business model.

The firm have set themselves a target of 100,000 subscribers to Altium 365, and revenues of US$ 500m by the year 2025. While this is achievable, the initial growth may be hampered by Covid19’s impact on small businesses. However, it is too early to make any estimation.

Altium draws most of its revenues from North America – mainly the USA. The segmented revenue analysis can be seen from the below chart.

Company Updates

The stock price tumbled as global economies were at a stand-still in March 2020. However, the stock has recovered since then driven by the tech rally, although not to the highs of February yet.

ALU, just like every other firm has been subject to volatility as investor mood and momentum shift. The recent surge in August was on the back of a good financial performance in FY2020.

We expect the high-flying firm to go through a year of slow growth, albeit grow during 2021. Altium has also made investors know that it will actively seek M&A opportunities in its bid to expand the total addressable market.


Source: Tradingview.com

Industry Analysis

The world is moving towards a more digital and technology driven economy. PCBs are at the heart of everything electronic and expectations are that its applications are going to increase further.

The global PCB industry is forecasted to grow at a compounded annual growth rate of 4.12% during 2020-2025 into a US$ 75 billion market.

Semiconductors which absolutely require PCBs are expected to be the next big product that would define large economies. The battle already looks to have started between the USA and China over semiconductors. The more competition and more internet of things applications we see, the greater will be the need for PCB’s.

Innovation and the industry will hence go hand-in-hand, and Altium will benefit as they are the market leader in providing design software.

Investment Analysis

Altium’s revenues have been growing at an average of approximately 19% over the past 5 years. The FY2020 showed a slowdown in this growth due to the impacts of Covid19. The firm posted US$ 189m in revenues with a 10% growth rate over FY2019.

The EBITDA margins determines the profitability of the firm as it measures the margin the firm makes on a unit sale of its product. The firm has maintained a stable margin with FY2020 posting 36%. Stable margins for a software company are positive signs – indicating that the customer acquisition costs, and churn rates are steady.

Income tax expense skyrocketed in FY2020 which resulted in net income declining by over US$ 20m. This has also resulted in EPS declining by 41% to just $0.24.

The cash position of the firm is US$ 93m. The current liabilities are US$ 81m. This shows that the firm can pay off short-term debt obligations even during unforeseen circumstances. The overall financial health of the firm is a sign of strength. The total assets exceed total liabilities by 2.64x. Most software technology firms assets are off the balance sheet due to the intangible nature of its assets. This only indicates stronger financial health of Altium.

The firm currently has US$ 13.9m in debt and its net debt position is (US$ 79.2m). The capital structure of ALU shows no debt until FY2019. Currently, the firm is capitalised by 93% equity and just 7% debt. This is an essential metric especially for a technology company. A high-equity structure comes with flexibility when it comes to operations and strategic decisions that have to be taken to drive growth. The markets have complemented this theory as well as they have punished capital intensive and high debt businesses during the March downturn.

Altium’s most recent dividend is 19 cents per share with a yield of 1.1%. The total dividend paid out during FY2020 is 27 cents even with a decline in earnings per share. This is a high-growth technology company and is therefore associated with lower dividend yields as the firm will strive to invest and drive growth, justifying its low dividend yield.

Recommendation

Altium is a stock that has not recovered to the levels it was trading prior to the pandemic and the uncertain economic conditions that came with it .However, its FY2020 performance showed that it is not as affected as other sectors are. The strong balance sheet should ease investor fears further. We issue a “Buy” recommendation as we forecast the stock to regain momentum as economies recover and hence drive growth in the long-term.

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