What is your professional pick?
Aconex (ACX). It provides a collaboration software platform to participants in the construction industry that allows projects to be delivered more efficiently by replacing the paper-based systems, which is still the 95% majority.
Aconex has a 27% global market share in a rapidly expanding market as construction projects migrate to Aconex style solutions. They now dominate the Australia and New Zealand markets and have recently been replicating the ANZ business model on a global scale with great success.
How long have you held Aconex?
We initiated our position in August 2015 after Aconex had sufficiently demonstrated the ability to be able to expand the international business profitably.
What do you like about it?
Aconex’s software provides an advantage to traditional methods. Aside from a significant administration cost saving, the speed information is received and distributed is far more efficient. There is a much lower risk of disputes as everyone is working off the same information. Collaboration software will continue to penetrate on a global scale at an accelerated rate and Aconex is perfectly positioned to capitalise on this market migration.
Revenues are for the most part recurring as the product is offered on a subscription basis. This provides confidence that Aconex will be able to deliver on guided earnings amounts as customers are very sticky. Surprises to earnings are far more likely to occur on the upside with new contract announcements.
How is it better than its competitors?
Aconex believes its ease of use is well ahead of competition with broad functionality. While it does not provide individual components that no competitors offer, it is the only participant able to offer a complete suite of these components. Its view is it is now at a scale to expand product gap. It spends 15% of sales on research and development, which is a bigger budget than most of its direct competitors turnover in revenue.
What do you like about its management?
Management is committed to driving international expansion, which already accounts for more than half of group revenue.
Leigh Jasper co-founded Aconex in 2000 and remains CEO. In its short tenure as a listed company, he has demonstrated a high level of communication with the market clearly defining and delivering on its strategy and outlook.
Rob Phillpit is the other cofounder and current executive director at Aconex. Given his background in heading document control at Brookfield Multiplex, he is heavily involved in product development and has a detailed understanding of what customers require. He is forward looking in terms of innovating new components for the Aconex product suite to keep them ahead of the game
What is your target price on Aconex?
We have a price target of $5.25 on a discounted cash flow basis, which represents 24% upside from the current market price. This is not overly demanding as it assumes earnings come in at the mid-point of the company’s four-year guidance.
At what point would you sell it?
We do not expect to sell Aconex in the short-term as Aconex is in the early stages of a very rapid expansionary phase. We would tolerate a weak earnings number but only if it was for the sake of expanding their global footprint.
How much has it added to your overall portfolio over the last 12 months? Since initiating a position on August 5, 2015 Aconex has added 0.13% to our absolute performance in a falling market.
Is it a liquid stock?
Historically, this stock has been relatively illiquid, which has limited our position size. Over the past three months, turnover has been 1-2 million shares each week. This has improved recently as stock came out of escrow
Where do you see the value?
While Aconex is trading on a very high multiple at 57 times FY17 earnings, this is justified by a 78% EPS growth in FY17, followed by 54% growth in FY18. These growth rates exclude any large contract wins that would result in a step change in earnings. Historically Aconex has managed to deliver these. Due to the nature of the business model, potential downside to earnings growth is limited while the upside is uncapped.
With a long term addressable market of $11 billion, Aconex is in a prime position to be the dominant player in a market that lends itself a couple of very large players.
Aconex
Source: Yahoo!7 Finance 1 October 2015
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