Another High P/E Stock Falls, Aconex

Another High P/E Stock Falls, Aconex

I have posted a few blogs in recent times related to the risk associated with profit downgrades for high P/E companies. For a general discussion of this effect read an earlier blog post here. Yesterday, another company fell victim to such an event. Aconex (ACX), a construction software group, announced a revenue and profit downgrade for the 2016-2017 financial year. Aconex was founded in Melbourne in 2000 but only listed on the ASX at the end of 2014. ACX supplies cloud-based project collaboration software to clients in the global construction industry with clients spanning over 70 countries worldwide. Since its IPO, the ACX share price has performed extremely well, climbing from the IPO price of $1.90 to $5.06 at the beginning of this year although it rose above $8 for a brief period in the middle of 2016.

Yesterday’s announcement simply stated that revenue for 2016-2017 would be in the range of $160-$165m, down approximately 7-8% from prior guidance. Due to operating leverage, the decrease in revenue is expected to reduce earnings (compared to prior guidance) by approximately 28-32%. The main markets contributing to the downgrade are U.K./Europe and the Americas, partly as a result of the Brexit and Presidential election respectively. Although guidance was downgraded, the company still expects revenue growth of 30-34% for the full year but unfortunately for shareholders, the damage was down with the guidance downgrade. The share price fell 45% yesterday and doesn’t look like bouncing today.

The massive sensitivity of share price to revenue and earnings expectations comes as a result of the high P/E of the stock. With full year EBITDA expected to be $15-18m, and a market capitalisation of $614m (post the share price fall) the P/E ratio calculates as somewhere between 34 and 41 times, and that is after the massive drop in share price! ACX was clearly priced for extraordinary growth which is now unravelling as a result of a hiccup in earnings.

Even more discouraging for shareholders is the fact that co-founders Leigh Jasper and Robert Phillpot, as well as a non-executive director and former CEO were all selling large parcels of their shares last year. With the benefit of hindsight, this appears to have been a prudent move considering the recent share price declines. 

For those considering buying in now to take advantage of the ‘low’ share price, the Rivkin investment team generally believes that the first profit downgrade is often not the last and it is therefore better to stay out for the time being. For detailed market commentary on this and many other stocks, consider signing up for a Rivkin Local membership.


This article was written by William O'Loughlin - Local Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via william.oloughlin@rivkin.com.au or by phoning +612 8302 3600.

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