Is Altium Limited (ASX: ALU) the best ASX growth share?
Altium is an Australian multinational software business that was founded in 1985. It now has offices globally in places like San Diego, New York, Boston, Munich, Shanghai, Tokyo and Sydney. Its software focuses on electronics design systems for 3D PCB design and embedded system development. Its services include Altium Designer, Altium Vault, CircuitStudio, CircuitMaker, TASKING and Octopart.
Does Altium Tick All Of The Growth Share Boxes?
There are many different attributes that investors look for when they’re trying to find the best growth shares on the ASX such as profit growth, a large total addressable market (TAM), a good economic moat, sticky revenue, a good balance sheet and a focus on shareholder returns.
Altium has been growing its profit at a very nice pace over the last several years. In its recent half year result of the 2019 financial year it grew net profit by 58% to US$23.44 million. In FY18 Altium grew net profit by 34% to US$37.5 million and in FY17 Altium grew net profit by 22% to US$28 million.
The software company is a profit compounding machine and there’s a good chance it could keep growing net profit by more than 20% annually until 2025, based on the targets that management have set.
As Altium’s revenue increases its operating profit margin – the EBITDA margin (click here to learn what EBITDA means) – is increasing, meaning that each additional revenue dollar is more profitable than the last and accelerates the profit growth to be even quicker than revenue growth. The EBITDA profit margin was 36.3% at 31 December 2018, beating the company’s previous goal of 35% quite comfortably.
Altium is one of a group of businesses that generate ‘Software as a Service’ (SaaS) revenue. This means a pleasing portion of its revenue is recurring – approximately 57.5% was recurring in the half year result.
However, most of Altium’s revenue could be described as sticky because there would be large moving costs associated with changing to a different software provider, far more than the cost of the software itself.
That does make it harder to steal customers as well, but Altium is steadily stealing market share from competitors with a supposedly better offering.
Altium is well positioned to benefit from the technological world that we live in. Its software is being used to design a whole manner of products, electronic PCB software seems to be integral for the ‘Internet of Things’ to become a reality.
Some of the biggest businesses and organisations that use Altium’s software are: Apple, Google, Amazon, Disney, Tesla, Toyota, Mercedes Benz, Microsoft, Boeing, NASA, Qualcomm, ResMed Inc (ASX: RMD), Cochlear Limited (ASX: COH) and many other worldwide businesses.
Altium has won a lot of credibility by having this impressive client list and is part of its journey towards its goal of market dominance.
Balance Sheet Strength
Profit growth is important but having a solid balance sheet is also a key factor to deciding if a business is the best or not.
A balance sheet is in good shape if it has a net cash position (where cash is higher than debt). Altium’s balance sheet is one step better, it has no debt at all. At the end of December 2018 it had US$58 million of cash which could be used for bolt-on acquisitions in the future.
A bonus with Altium’s balance sheet is that it expenses its research & development costs straight away, which is the most transparent way of doing things for a technology company.
The main purpose of a company is to generate returns for its shareholders. Paying a dividend is one of the most popular ways to share some of the spoils with investors as the years go by.
Altium is focused on returning profit to shareholders by growing its dividend every year. The dividend increased in the HY19 report by 23% to AU 16 cents per share from 13 cents a year ago. In March 2013 the half year dividend payment was AU 3 cents, so its half year dividend has increased by 433% in that time.
Is Altium A Buy Today?
According to CommSec, Altium is valued at 56 times the estimate earnings for the 2019 financial year. Of course, this is expensive compared to most other ASX shares like Commonwealth Bank of Australia (ASX: CBA) or Telstra Corporation Ltd (ASX: TLS).
But, Altium has a global earnings base and is aiming for strong growth over the next six years. By 2025 Altium management want the company to be the dominant player in the PCB industry, have 100,000 Altium Designer subscribers and hit annual revenue of US$500 million.
If it achieves these targets then today’s share price could look quite cheap in a few years, particularly if interest rates remain as low as they are.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclosure: Jaz owns shares of Altium at the time of writing, but this could change at any time.