Does Nearmap present a compelling buying opp?

Having concluded that management’s guidance following the recent market update appears decidedly cautious, Citi has lifted its rating on the aerial imaging business Nearmap (ASX: NEA), to Buy from Neutral, and sees recent share price underperformance as presenting a buying opportunity.

Down -2.75% in early morning trade, the stock is currently trading -45% down on its three-month high of $2.28, and a 98.4% discount to the $2.50 target price based on the companies reporting on the stock (as covered by FN Arena).

Based on the company’s ability to collect imagery using aeroplanes enabled with its own patented camera systems and processing software, Nearmap is effectively a pure-play on aerial imaging.

Over reliance on North America

While Citi estimates FY22 will be the peak year for cash burn, the bigger issue for the broker is around key investor concerns held by the wider market. For example, while the company increasingly looks to the North America market for growth, many investors have cause for concern, especially in light of current market jitters.

However, in a prelude to half year announcement on 16 February, mid-December the company disclosed that it expects the Annualised Contract Value (ACV) of its North America portfolio for the first time to surpass the ACV of its Australia and New Zealand portfolio.

This milestone is expected to happen by the end of the second quarter FY22, with Nearmap also expecting its North America business to represent the majority of the Group ACV portfolio in the future as growth in that market continues to accelerate.

While it’s only six weeks since Nearmap provided this guidance, investors should pay particular attention to any updates on the outlook for the North America market when the half year results are released.

Fundamentals

At FY21 the company reported annual contract value (ACV) at 30 June 2012 of $128.2m or $133.8m on a constant currency (CC) basis, up 26% on the previous period.

While the company reported a statutory loss after tax of $18.8m - compared to $36.7m in FY20 – this result was better than many brokers had expected.

While Nearmap’s long-term returns have been encouraging, the stock no longer enjoys the market-darling status it once did.

Despite the growth trajectory in North America, there’s growing concern that the future scale of high-quality aerial imagery could eventually be cannibalised by satellite imagery.

What other brokers think

• Based on recent updates around North American annual contract value exceeding A&NZ, Morgan Stanley expects a strong first half result of an approximate $15m uplift to total group contract value of over $143-144m. The broker retains an Overweight rating and target price of $3.20.

• Meantime, following the FY21Macquarie has adjusted its valuation methodology and reduced the target to $2.20 from $2.60, while the Neutral rating remains unchanged.

Consensus is Moderate Buy.

Based on Morningstar’s fair value of $2.28 (28/06/21) the stock appears to be undervalued.

A 10-year snapshot of Nearmap's share price performance