The Nearmap Ltd (ASX: NEA) share price jumped 11% to $0.675 today after the aerial mapping company released a preview of its annual results for financial year 2017.
As of 30 June 2017, Annualised Contract Value (ACV) is expected to be approximately A$40 million, growth of 16% from $34.4 million as of the same date last year. The US operations also experienced a strong lift, with ACV rising from US$1.5 million to US$5.3 million over the past year.
Pleasantly, the rate of growth accelerated in the second half at both the Australian and the US businesses. According to today's release, Nearmap's Group ACV was A$47 million as at 30 June, and the company expects to earn between $5.8 million and $6.2 million in earnings before interest, tax, depreciation and amortisation (EBITDA). Cash on hand was $28.4 million.
Should you buy?
Valuing Nearmap is a tricky proposition, as it is unprofitable, but we could use something called the EV/EBITDA ratio as a yardstick.
For illustration, as of yesterday's close, the company had a market capitalisation of $236 million. Subtracting net cash of $28 million gives it an 'enterprise value' ('EV') of $208 million. It's expecting to earn $6 million in EBITDA at the mid-point of guidance, giving it an EV/EBITDA ratio of 34.6, which is very high.
However, looking at the half-year results, 60% of segment earnings were chewed up by losses in the USA business. In other words, losses from the US expansion are greatly masking the company's potential profitability.
So instead of thinking 'Nearmap has an EV/EBITDA of 34.6 and is very expensive', the situation is more like 'Nearmap has a core business (Aus) which essentially justifies today's price, however today's price looks high because of heavy investment in an overseas expansion (USA) which could potentially pay off many times the company's current value'.
As a result, I would call Nearmap a high-risk investment, especially given the likelihood of growing competition and the potential for failure in the US market. However, the rewards on offer are also significant, management is demonstrating progress in both markets, and I think Nearmap is a good prospect for a smaller part of investor portfolios.
