16-Feb-2021:  Ord Minnett: Atomos Limited (AMS): Back on track

Analyst:  Jason Korchinski, Research Associate, (02) 8216 6348, [email protected]

• Last Price: A$1.06
• Target Price: A$1.35 (Previously A$1.24)
• Recommendation: Buy (Previously Speculative Buy)
• Risk: Higher
• ASX Code: AMS
• 52 Week Range ($): 0.30 - 1.24
• Market Cap ($m): 231.6
• Shares Outstanding (m): 218.5
• Av Daily Turnover ($m): 4.7 3
• Month Total Return (%): 23.3
• 12 Month Total Return (%): -14.2
• Benchmark 12 Month Return (%): -3.7
• NTA FY21E (¢ per share): 16.1
• Net Cash FY21E ($m): 18.3

The 1H21 result illustrated a return to form for AMS. As a global business, the early stages of COVID-19 had a drastic impact. However, by shoring up its supply chain and releasing new products, AMS is now benefitting from shifting trends in how individuals consume video content. The rise of Netflix and other online streaming/video platforms driven by lockdowns means there was surplus demand for original and high-quality content, for which AMS’ hardware helped to meet. AMS management has also demonstrated its ability to manage its fixed cost-base, maintaining a rate of ~$1.6m per month vs ~$2.3m per month pre-COVID. Management view this rate as the new norm and have called out relatively modest increases going forward. The view that AMS is likely to benefit further from the accelerated shift towards new content creation, combined with the positive gross margin reversion, gives us the confidence to upgrade our recommendation to a BUY and increase our price target to $1.35 (representing a TSR of 27%).

1H21 result

1H21 revenue of $32.8m showed strong signs of recovery, growing significantly on the 2H20 (+178% hoh). Gross profit margins also saw an improvement on the second half, with gross margins of 44.9% (+4.2%pts on OMLe), largely driven by a reduction in discounting and some new products. The reduced opex and strong GP margin resulted in an EBITDA result of $2.5m ($1m ahead of OMLe). Positive cash flow helped to bolster AMS’ balance sheet, with the company well placed with ~$23.3m. Management have called out the potential for M&A opportunities in the near future as a means of deploying the cash.

Changes to forecasts

AMS management, whilst not providing explicit guidance, did outline that 1H sales momentum is expected to continue into the second half and that it anticipates further margin improvements off the back of new products and revenue streams. Therefore, we have made modest increases to revenue, EBITDA and NPAT off the back of the 1H21 result. See page 3 for more details.

Key risks

The key risks for AMS include:

1. Supply chain risks,
2. Product obsolescence,
3. Competition, and
4. Global macro events.

--- Click on the link above for the full OM report on AMS ---

30-August-2020:  Ord Minnett: Atomos Limited (AMS): Leave FY20 on the cutting room floor

• Last Price: A$0.52
• Target Price: A$1.24 (Previously A$1.15)
• Recommendation: Speculative Buy
• Risk: Higher

Atomos’ supply chain, from its R&D, manufacturing, wholesalers and endconsumers have been highly impacted by COVID-19 restrictions. It has materially limited the company’s ability to refine, launch, market and sell new and existing products. These issues are, however, temporary. While FY20 was a year to forget, the shock has offered a chance for the company to reset its cost base to move forward more profitably. We expect long-term margins to be up on our forecasts at initiation in Dec-19 thanks to permanent cost-outs which see AMS breaking even at a revenue rate of ~$4.5-5m per month (OMLe) compared with ~$3m of monthly revenue to start FY21. With a recovery on the horizon, new products in development to take advantage of streaming/live content production and a long-term thematic intact, we retain a Spec. Buy. Our target is now $1.25.

FY20 a year to forget

• FY20 sales declined by 17%, with 2H20 down 60% on pcp. While costs were extracted through the 2H, this happened over the half (ie not fully realised for the whole period), resulting in an EBITDA loss of $8.1m (OMLe $5.9m loss). The balance sheet ended in good shape, holding ~$19m in cash and ~$17m in inventory, with no debt.

Treatment more important than the virus

• AMS flagged at the 1H20 result that COVID-19 caused production and product development delays due to scale-down of Chinese facilities. In time, the virus also saw border closures and postponement/cancellation of trade shows, seeing key marketing and selling opportunities lost.
• In response, the company has taken a hard line on costs, which drop its break-even point to ~$4.5-5m per month of revenue vs the average in 2H20 of ~$2m per month, and the Jul/Aug-20 run rate of $3-3.2m.

Stay the course, keep rolling

• We remain positive on Atomos’ market positioning and structural growth in entertainment and social markets where the business is not as well penetrated. While COVID-19 has delayed products and sales into these markets near-term, we still see a significant opportunity at hand. Acceleration of streaming product development could offer a short-term...

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22-May-2020:  Ord Minnett:  Atomos Limited: Fast forward to higher margins

OM:  Spec Buy, Higher Risk, TP: $1.15 (current SP: $0.52).

26 February 2020:  Ord Minnett:  Atomos Limited:  Revenue growth compressed by coronavirus

Excerpts:

Atomos produced strong 1H revenue, but at a lower than expected gross and EBITDA margin than anticipated. More importantly, AMS updated on the impact of coronavirus on the supply chain and product releases. The release of Neon, already delayed from a late-2019 release, has been delayed further into late FY20, leading us to downgrade growth forecasts for 2H20 materially. We remain encouraged by the sector thematic and Atomos’ position in the market, but these product delays and product discounting strategy likely impact perception of business quality. Following downgrades to our forecasts, our price target falls to $1.50 per share. Given the valuation upside and temporary nature of the coronavirus impact, we remain positive, but move to a Speculative Buy.

Coronavirus impacts production and product releases

AMS highlighted minimal impacts attributable to COVID-19 (Coronavirus) to the core product range to date, with built-up inventory late in 2019 helping negate supply chain troubles. However, AMS has not been completely unscathed with its new Neon product which had already been delayed from a late-2019 release to early-2020, now delayed until 4QFY20. Current production capacity is only ~30% of its prior level, but management are hopeful two additional factories will be operational by 4QFY20. We remain cautious on the 2020 outlook given the unknowns of production ramp up and product release timing.

Discounting drives gross margin lower

Discounting in the wake of an inventory rush following resolution of a component supply issue saw 1H20 revenue come on at a reduced gross margin. GM was further impacted by US/China tariffs (now 7.5%, was 15%).  We now believe GM will remain around 44% in the medium-term as the business looks to stimulate demand following release and production delays.

Valuation and recommendation

While the delays to production and release of Neon are disappointing, these issues are temporary. We prefer to look long into the social and entertainment markets where Atomos is still underpenetrated. Following adjustments to our modelling, our target falls from $1.75 to $1.50.

--- click on link above for the rest of OM's report ---

23 December 2019:  Ord Minnett:  Atomos Limited:  A resolution to grow  

"We initiate coverage of innovative media device business, Atomos (AMS), with a Buy recommendation and $1.75 price target, implying a total shareholder return of 21%. Atomos has spent the past three years investing heavily in its IP with the design of a new chip to power its video and picture display and capture screens. This work culminated in the release of NinjaV, a hit product with Pro Video users. The business is now poised to leverage its significant R&D and proprietary relationships to push deeper into the Social and Entertainment markets which are worth multiples of Pro Video where Atomos has had most success to date. We expect operating leverage to drive EBITDA and NPAT growth of 49% pa and 71% pa respectively (FY20-25) from revenue growth of 21% pa. Buy."

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Disclosure:  Not Held.