Nearmap down, but not out

Nearmap (ASX:NEA) is one of the laggards among Livewire readers' 10 most tipped small caps for 2020. Its stock price is down 7% year to date, versus a whopping 12% gain for that small-cap list our subscribers picked overall.

Michelle Lopez of Aberdeen Standard Investments has been a holder of NEA for the past year. She'd flagged the geospatial mapping technology is seeing near-term risks as the pandemic batters cash flows and spending plans across its customer base, which comprise small to medium-sized enterprises in areas such as construction and engineering.

Despite the stock's volatility, Aberdeen remains a holder. Read on for Michelle's insights on what NEA management are doing to map out a path to success.

How long have you held the stock and what attracted you to the company?

We have held Nearmap for approximately 12 months, and it has been a bumpy ride given the contract churn that was seen earlier in the year and then the additional uncertainty Covid-19 created.

Nearmap uses aerial imaging and geospatial mapping technology to deliver high-resolution images to customers. Its competitive edge comes from the tech, which enables NEA to fly higher, faster and more often at a lower unit cost than others. It then stitches images together rapidly as a cloud-based service.

Its model generates high margins and returns on sales investment, while its addressable market is large and growing. Competitors face barriers to entry, given intellectual property in NEA’s camera technology, platform functionality such as 3D imagery, and scale required to offer a subscription service nationally. In response to COVID-19, NEA has reduced costs, capital expenditure and headcount. 

Whilst it is one not without risks, we are optimistic it can deliver significant value over three years as the market grows, they increase market share and the business matures into a cash flow breakeven set of results.

What were the key points of the recent result?

In our view, the results were a significant improvement on their first-half results. They saw a normalisation in churn, continued momentum in contracted revenue growth particularly in ANZ. Notably, there was also a significant improvement in the business cost base facilitating better cash flow.

How did the results compare with your expectations? And those of the broader market?

The result was in-line with our expectations in terms of the headline numbers meeting their ACV guidance as well as guidance on its cash position. In terms of outlook the company is dealing with a significant amount of uncertainty in terms of customer demand so chose not to provide guidance at this point.

However, pleasingly they did highlight that the first 7 weeks of the year saw growth at similar rates as Q12020. They also flagged they are expecting cash balances to be flat in 2021 indicating they are targeting cash flow breakeven over 2021 in-line with previous communication with the market.

Where there any surprises? (If so, please outline them)

There was some softness in North American contracted revenue growth, which may have been a result of a pullback of sales investment. However, if you pull out the impacts from an acquisition they completed, some in the market are questioning the underlying organic growth in the North American business. 

The Nearmap stock price had also performed fairly well going into results (+20% over a month). The combination of a recently strong stock price and the discussed weakness in the North American growth looks to have driven the stock sell-off on the day of results.

Has your position on the stock changed post results?

We have a modest position in the company at this juncture, which arguably reflects our views that there is still significant uncertainty in the shorter term outlook for the company, despite a favourable longer term view on the business. 

We are also balancing the longer-term potential with the near term risk of lower contracted revenue growth given customers are likely to scale back investment in light of the tough economic backdrop.

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