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Nearmap Ltd

The star of Bethlehem’s guiding light certainly hasn’t washed over the Nearmaps share price during Christmas contemplations.
Had the three wise men gone long the stock, their manger arrival would have no doubt been heralded with stop loss orders.
Nearmaps (NEA), a stellar 2019 performer, when the p (price) outran the e (earnings), more than doubling to $4.00, flamed out with price falling into the mid $2.00’s. The short position in the stock currently sits at a near record high of 12%.
Concerns raised were of increasing competition and whether the investment step up would deliver adequate returns. In the second instance we expect the investment in sales, marketing and product development, delivers a three-year compound annual growth rate of over 20%.
The equation if you like has flipped around where the forecast e (earnings) is now paying you to be patient for the p (price). If anything there is probably upside risk to our target price of $4.20. It is, I repeat, high risk. NEA is currently around $2.50.
Earnings drivers are going to be better than expected traction from new products – especially those integrated with AI (artificial intelligence), expansion into new markets like the UK and Europe. Increased sales should fall straight to the bottom line. And the next run in the stock may be caused by short covering going into December half reporting.
Doubters suggest returns will be impacted short term by the higher spend on product development and sales/marketing. Our view is there will be some impact on EBITDA but investors need to look through and see the step up will increase sales and expand Nearmap’s customer addressable market – particularly with AI implementation. This alone makes Nearmaps stand out. There is also a focus on driving yield from deeper pentation into current business verticals through partnerships with Open Solar and City Works. And this in turn will help grow subscriber numbers more quickly than if Nearmaps, itself, spent the shoe leather. 
A good example of this is the $5 million purchase of rooftop geometry analytics measurement technology to give Nearmaps added edge. Remember NEA is building recurring revenue – it’s a SaaS (service as software) provider. And the market while it got carried away last year, does pay high multiples for this recurring revenue.
The key will be how revenue translates to EBITDA. As mentioned there will some material impact in the current figures because of increased investment. But these could be considered to be one offs. 
The USA market in the next 12-18 months is expected to overhaul more mature Australian subscription sales and in the next two years grow in total from around $120 million to over $150 million.
The acquisition of Pushpin – the rooftop geometrics business – suggests NEA cash flow is likely to be negative until FY 22. NEA has a strong balance sheet with about $76 million in cash, and that will reduce by approximately half as NEA pursues its objectives. IF NEA does make a strong push into Europe or the UK I would expect it to take advantage of a higher share price and funds the growth through an equity placement.
Over time NEA’s business model develops where is has strong recurring income (Australia), developing (USA) and new (Europe/UK). This will see cashflow be leveraged up and once the market comes to that realisation, albeit aware of the execution risk, it will be happy to pay much more for the stock than where it is presently trading.

By Kim Slater 

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