Aerial imaging company Nearmap is drawing attention from brokers, who are excited about the company’s US growth prospects.
-Strong subscriber base in A&NZ
-US growth in early stages
-Scalable model offers substantial margin upside
By Greg Peel
Nearmap ((NEA)) is a software-as-a-service (SaaS) company providing high resolution, frequently updated aerial imagery across Australia, New Zealand and more recently, the US. The company offers overhead images and last year introduced oblique images (45 degree angle from each point of the compass), and in coming months is expected to offer 3D.
As at last year, Nearmap had 7,477 subscribers in Australia, stockbroker Moelis notes, across business and government, with an annualised contract value of $43.4m. Positive free cash flow generated downunder supports a US business which is currently loss-making, being only new, at 742 subscribers.
The size of the US market is estimated to grow to around US$1.4bn by 2022 or some 5-10 times the opportunity in the Australian market, growing at a compound annual rate of around 15%.
Nearmap is currently targeting its sales and marketing efforts towards key industry verticals, including architecture, construction, engineering, insurance, solar energy, utilities and government. As customers become familiar with the products, additional use cases often become apparent, Moelis notes, driving increased data usage by existing subscribers as well as attracting new users.
Further geographical expansion is being considered, with Canada being the obvious next step. The company also sees potential benefits from machine learning and AI solutions.
But for now, the focus is on the US. Nearmap’s technology was built to scale from the outset, and the business model can essential be dragged and dropped into new regions. The company has reached the point where a large proportion of its Australia and US cost bases are relatively fixed, which provides for operating leverage and margin growth opportunity. Moelis estimates margins could rise from negative now, net of domestic and US, to around 20% by FY22.
Moelis uses a discounted cash flow valuation model to reach a target price of $1.43, some 24% upside from the last traded price. The broker initiates coverage of Nearmap with a Buy rating.
Morgan Stanley is the only FNArena database broker to date to initiate coverage of the stock, and earlier this month invited Nearmap’s CFO to present at the broker’s Emerging Companies Conference.
The CFO reiterated FY18 guidance and a conviction in 90% gross margins in the US, in line with those in Australia, and a 50% free cash flow margin when the US business matures. The company enjoys a breadth of opportunity, Andy Watt declared, with scope to sustain strong growth across A&NZ and the US in small, medium and larger enterprise subscribers and in current 2D and new products.
Morgan Stanley has an Overweight rating (Industry view In-Line) on the stock with a $1.40 target, citing compelling value in the growth profile on solid operating leverage.
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