All eyes on Altium

Altium (ALU) is a provider of software that aids in printed circuit board (PCB) design and data management. PCB’s are the key component of virtually all electronics such as computers and the PCB industry is now worth many billions of dollars worldwide.

ALU was picked up in Rivkin’s new Value Strategy at the beginning of February and is now the best performing stock in this portfolio. ALU reported its results for the half year ended 31 December 2017 in late February and since then the share price has continued to climb.

The results were very impressive with revenue growing 30% while net profit grew 51%. Altium’s revenue growth has been accelerating since 2012 and the EBITDA margin of 30% is the highest achieved by the company in a first half.

This steadily increasing profitability is the characteristic of the stocks that the Value algorithm attempts to pick.    

Altium announced an interim dividend of $0.13, $0.02 more than the interim dividend of last year, which went ex-dividend on 2 March. This is only a dividend yield of 1.1% which highlights another characteristic of The Value Strategy, the stocks selected generally have low dividend yields.

This is often a characteristic of growth stocks and in this case it is representative of the fact that the company is reinvesting its profits back into the business rather than paying them out to shareholders.

Altium has demonstrated consistent revenue growth over the last five years and has reported profits every year since 2012. This is precisely what you want to see as a fundamental investor.

The chart below shows the growth in revenue on a half by half basis since 2012 (excerpted from the Altium Half Year Investor Presentation).

Figure01: Revenue and EBITDA growth since 2012

In addition to dividend yield, The Value Strategy looks at profits relative to cash flows. Research has shown that when a company generates high profits but low cash flow it can be a sign that earnings are likely to be more volatile.

Choosing companies that have high cash flows relative to profit, therefore, can be a sign of more stable and sustainable earnings. In the case of ALU, profit and cash-flow were identical for the half year ended December 2017 at approximately $14.8m. This signifies that profits represent actual cash earnings and therefore accruals (i.e. booking profits before cash is received) are a minor component of ALU’s business. This is another common factor for all stocks selected for The Value Strategy.

The stock market clearly liked these results as the share price rose 17% in the days following the announcement. The ALU holding in the Value portfolio is now showing an unrealised gain of 44% since 5 February while the portfolio as a whole is up 4.5% over that time.

While not every stock in the portfolio will be a winner, the benefit of holding a diversified portfolio is that you can achieve returns with lower volatility than you might with a more concentrated portfolio.  

The Value Strategy is a new strategy developed at Rivkin to provide investors with a portfolio of ten stocks that we expect to perform well based on a systematic fundamental approach. Although it is still early days for the strategy, the outperformance relative to the ASX 200 since we started the strategy is encouraging. New members joining Rivkin can start this strategy at any time.