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The Accent Group Ltd (ASX: AX1) share price is lagging behind the consumer discretionary sector after it was downgraded by Morgan Stanley.

The AX1 share price is trading flat at $2.41 during lunch time trade when the sector gained 0.4%.

Big gains by the Premier Investments Limited (ASX: PMV) share price, JB Hi-Fi Limited (ASX: JBH) share price and Harvey Norman Holdings Limited (ASX: HVN) share price is pushing the sector ahead of the S&P/ASX 200 Index (Index:^AXJO).

Time to take profit on the AX1 share price?

The Accent Group share price is probably held back by Morgan Stanley after it urged investors to take profit now.

The broker downgraded the footwear retailer to “equal weight” from “overweight” as it believes Accent’s growth momentum is slowing.

“AX1 has executed strongly over the last 12 mths in unusual conditions,” said Morgan Stanley.

“Whilst near-term momentum should continue, we think EPS [earnings per share] growth will decelerate from +28% in FY21 to +3%in FY22 as conditions normalize.”

Strong trading update fails to inspire

The downgrade follows a bullish trading update by Accent. Management is expecting earnings before interest, tax, depreciation and amortisation growth of around 40% to 45%.

The earnings boost is supported by good top-line growth, cost savings from rent abatements and wage subsidies and accelerating like-for-like store sales growth.

But Morgan Stanley believes all the good news is priced in even as it lifted its 12-month price target on the AX1 share price to $2.60 from $2 a share. The lift in the price target is due to the better-than-expected trading update.

Earnings momentum running out of puff

However, the broker doesn’t believe the good times can be sustained – at least not at the same pace. Results in the current financial year will be great due to a “pull-forward” in demand for its shoes.

This refers to consumers rushing to buy sports equipment during the COVID-19 lockdown. This means fewer will need to buy shoes over the next several months.

Also, the subsidies and stimulus during the pandemic will taper off. As the vaccine is rolled out and when consumers start holidaying again, they will be spending less on sports equipment too.

Good news already reflected in the AX1 share price

“AX1′ strong momentum is now reflected in the share price, increasing +42% over the last 12 months, meaningfully outperforming the XJO -1%,” noted the broker.

“We see limited valuation upside with the stock trading on 18xFY22 P/E or a ~25% premium to the five-year average multiple of 14.5x.”

More reading

• 5 reasons inflation might bite ASX investors in 2021
• Goldman Sachs says sell Premier Investments (ASX:PMV) shares into today’s big rally
• ASX 200 down 0.3%: Altium sinks, Premier Investments rockets, energy shares rise
• Why Oil Search, Praemium, Premier Investments, & Universal Store are storming higher
• Here’s why the Premier (ASX:PMV) share price just hit an all-time high

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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2020 was a year characterised by some of the lowest inflation figures Australia has ever seen. Together with a rising share market since 23 March, it proved a lucrative combination for investors.

In fact, from 23 March to today, the S&P/ASX 200 Index (ASX: XJO) is up roughly 47%.

But with record low interest rates, quantitative easing (QE) programs and record budget deficits around the world, many investors are starting to worry about inflation, perhaps in the not-too-distant future.

As history has repeatedly told us, you can’t put too much extra currency into the economy without it starting to lose value. You might wonder why inflation would be bad news for share investors, since many companies will be able to pass any inflationary costs straight onto consumers.

But the reason is that higher inflation normally comes hand in hand with higher interest rates. And higher interest rates are very bad news for share prices across the board.

So will we see inflation in 2021?

One commentator thinks we might. According to reporting in the Australian Financial Review (AFR) this week, Morgan Stanley’s global head of economics Chetan Ahya has just released a note outlining 5 reasons why “inflation is set to rise much more than people are expecting”.

Inflating expectations

They are as follows:

1. Private sector risk appetite – Mr Ahya points out that he expects the US economy to grow by a whopping 5.9% in 2021. He also points to the recently-acquired Democratic control of the US Congress as a likely reason why we might see further fiscal stimulus.
2. ‘Soft’ unemployment – Ahya reckons that most of the job losses around the world that came as a result of the pandemic will “rebound rapidly once the economy fully opens”.
3. Going for growth – Ahya notes that global policymakers such as central banks like the Reserve Bank of Australia (RBA) and the US Federal Reserve intend to “run the economy red hot” in order to rapidly return to full employment as soon as possible.
4. Reigning in tech and trade – Ahya tells us that the US government, in particular, is aiming to ‘reign in’ the tech sector. Amazon.com, Inc (NASDAQ: AMZN) and Facebook Inc (NASDAQ: FB) are already facing anti-trust action. Tech is a famously ‘deflationary’ industry, so turning away from this sector could result in inflationary pressure. He also notes that deflationary ‘free trade’ policies are unlikely to resume given ongoing tensions between the US and China in particular.
5. Shifting targets – Ahya reckons that the new ‘average inflation’ targets that central banks are adopting will allow inflation to run higher than what investors have seen in the past before a commensurate rise in interest rates. The report points out that Morgan Stanley economists expect US inflation to hit 2% at the end of 2021 and to “overshoot” 2% by 2022.

What higher inflation would mean for global share markets

Finally, Mr Ahya points out that if inflation rises more than expected and exceeds 2.5%, “we could see a sharp swing in expectations for Fed policy, with attendant financial market volatility“.

Something to watch out for in 2021 and beyond for ASX investors!

More reading

• Goldman Sachs says sell Premier Investments (ASX:PMV) shares into today’s big rally
• ASX 200 down 0.3%: Altium sinks, Premier Investments rockets, energy shares rise
• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 drops lower
• Are the recent US elections turbocharging the ASX 200?

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of Facebook. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Facebook and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon and Facebook. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Premier Investments Limited (ASX: PMV) share price is topping the leader board but Goldman Sachs thinks you should dump the stock now.

The PMV share price surged over 15% to $25.90 this morning and is the best performer on the  S&P/ASX 200 Index (Index:^AXJO).

The apparel and stationery retailer is miles ahead of the Cimic Group Ltd (ASX: CIM) share price, which is in second spot.

The Oil Search Ltd (ASX: OSH) share price is in third position and both of these jumped by over 5% each.

PMV share price surges on trading update

The rocketing Premier share price comes on the back of a bullish trading update released this morning.

Management said that total sales jumped 5% in the first 24 weeks of 1H21 ended 9 January 2021 to $716.9 million. Online sales were the standout as that jumped 60% over the same time last year to $146.2 million.

The group expects interim earnings before interest and tax (EBIT) to jump by as much as 85% to between $221 million and $233 million.

Looking fashionable

Like-for-like (LFL) sales was also outstanding. This key retail measure that compares sales of stores opened for at least a year jumped 26.2% in Australia and 18% globally.

The group’s online sales commands a significantly higher EBIT margin than the EBIT margin of the retail store network.

Management also highlighted outstanding sales and gross margin growth in Peter Alexander, Just Jeans and Jay Jays in both Australia and New Zealand.

Better than expected but still not enough

The total sales figure exceeded Goldman Sachs’ first half forecast of $664 million but that wasn’t enough to impress the broker.

“This is a significantly stronger profit than expected, demonstrating a strong sales surge driving expanded gross margin and operating leverage as consumer spending recovered across some apparel categories,” said Goldman.

“Operating costs are likely to have benefited from temporary benefits at start of this financial year (e.g. Jobkeeper), but this was expected to be more muted in 1H21 versus 2H20 and likely much less important than the operating leverage impact from strong comparable store sales growth provided in this update.”

Is the PMV share price a buy or sell?

Goldman Sachs reiterated its “sell” recommendation on the PMV share price with a 12-month price target of $19.20 a share.

If the broker is right, the Premier share price will need to crash by more than a quarter to reach fair value.

More reading

• ASX 200 down 0.3%: Altium sinks, Premier Investments rockets, energy shares rise
• Why Oil Search, Praemium, Premier Investments, & Universal Store are storming higher
• Here’s why the Premier (ASX:PMV) share price just hit an all-time high
• Here’s why the Universal Store (ASX:UNI) share price is surging 10% higher
• 5 things to watch on the ASX 200 on Wednesday

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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There are some ASX small cap shares worth buying and owning according to fund manager Naos Asset Management.

What is Naos Asset Management’s investment approach?

Naos is led by chief investment officer (CIO) Sebastian Evans. NAOS Small Cap Opportunities Company Ltd (ASX: NSC) is one of the listed investment companies (LIC) operated by Naos.

That particular LIC looks at businesses with market capitalisations between $100 million and $1 billion.

The fund manager has a number of investment focuses. It looks for businesses that are good value with long term growth potential. With its portfolio, Naos believes it’s better to have a quality portfolio rather than numerous holdings. That’s why it only holds around 10 positions in each fund, with each ASX share representing a high-conviction position.

Naos invests in the small cap ASX shares for the long-term. It considers the performance and the liquidity of its positions whilst ignoring the index. Performance can sometimes be quite variable when compared to the index.

It looks to invest purely in industrial companies whilst also considering the ESG factors (environmental, social and governance).

BSA Limited (ASX: BSA)

Naos describes BSA as a solutions-focused technology services small cap ASX share.

BSA assists clients in implementing their physical assets, needs and goals in the areas of building services, infrastructure and telecommunications. BSA clients include the National Broadband Network (NBN), Aldi Supermarkets, Foxtel and the Fiona Stanley Hospital.

In a recent monthly update, Naos pointed out that BSA announced two significant releases that the fundie believes will provide the company with an excellent base of work with tier-1 clients for the foreseeable future.

Naos said that most significantly, BSA was able to secure a renewal contract with NBN for up to 8 years commencing in early 2021.

Based on the initial contract revenue figures, BSA has secured a greater share of the overall NBN maintenance work due to what the fundie believes has been high levels of service and customer satisfaction, which has allowed BSA to gain market share from far larger competitors.

BSA also announced in December that it had successfully secured a five-year contract with Telstra Corporation Ltd (ASX: TLS), focusing on property and telecommunication asset works in Tasmania and Victoria.

In addition to those two contract wins, over 2020 BSA was able to secure a new contract with Foxtel as its sole contract provider. It was also able to successfully move into the mobile and wireless space with clients such as the NSW Telco Authority.

Naos said that if the small cap ASX share can continue to innovate in the way it meets and exceeds its clients requirements then the fundie believes BSA has the potential to be a business that generates more than $650 million of revenue.

According to Commsec, the BSA share price is valued at 10x FY23’s estimated earnings.

Big River Industries Ltd (ASX: BRI)

Big River describes itself as an integrated Australian timber products business that operates across the full continuum from procurement of raw materials through to sale of finished products to end users.

Naos pointed out that the small cap ASX share announced a large acquisition of a business called Timberwood for a consideration of $24 million which equates to 5.1x the pro forma FY20 earnings before interest, tax, depreciation and amortisation (EBITDA).

Timberwood is a specialty manufacturer and distributor of a range of panel products. The acquisition was majority funded by a $20 million placement which, after the acquisition of Timberwood and the closure of the Wagga Wagga facility, will provide Big River Industries with significant financial flexibility to continue to acquire similar complementary businesses.

The company also provided a trading update, it’s now expecting underlying net profit after tax to be more than 10% higher than the prior corresponding period. Naos said this is a strong result considering the prior period didn’t include COVID-19 impacts.

More reading

• Interest rates could be at ultra low levels for years, so buy this ASX dividend share
• Infinite games: 3 ASX shares with long-term visions
• These were the best-performing ASX IPOs in 2020
• The Telstra (ASX:TLS) share price sank 15% lower in 2020: Time to buy?
• Can the ugliest ASX 200 dogs of 2020 turnaround in the New Year?

Motley Fool contributor Tristan Harrison owns shares of NAO SMLCAP FPO. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Treasury Wine Estates Ltd (ASX: TWE) share price has halved in the last 12 months as China-related policies continue to depress the company’s earnings and growth trajectory.  

While previous broker updates were cautiously optimistic for the Treasury Wine share price, the latest data from Goldman Sachs points to more risks ahead. 

US wine sales moderating 

Nielsen provides suppliers, importers, distributors and retailers with comprehensive US retail wine sales and direct-to-consumer wine shipment data.

The latest figures from Nielson point to moderating wine sales at the industry level after an extended period of COVID-19 driven growth. However, Treasury Wine sales captured continued to underperform the market, said Goldman.

The broker noted that the appreciating Australian dollar is likely to make the company’s exports less competitive in key markets compared to other export competition. The Australian dollar/US dollar has rallied to an almost 3-year high of 77 cents in recent weeks. 

China woes continue 

Goldman describes the significant changes in trend in the China related data as ‘unsurprising’. It notes a slowdown in both Chinese imports from Australia and Australian alcohol export data. However, the full extent of the impact of the temporary deposit measures from China will only be known in the company’s next update.

The report also noted the effects of the rising Australian dollar is also impacting its Chinese pricing, with an increase in key products on Chinese e-commerce websites. 

Lower Treasury Wine share price target 

As a result, Goldman’s 12-month price target was lowered to $8.60 or a downside of 4.7% to its current price of $9.01, at the time of writing.

The broker outlines a number of upside and downside risks that could play out 2021. Key upside risks include a decline in the Australian dollar, a faster recovery of trading in the US operations and better than expected outcome from the final stage of China’s anti-dumping investigation. 

While key downside risks included further deterioration in China’s trade dispute and macro, further execution issues from direct strategy in the US, risks of misalignment of significant inventory build with demand, margin pressure from retail partners and further appreciation of the Australian dollar. 

More reading

• 5 things to watch on the ASX 200 on Wednesday
• Why the Treasury Wine (ASX:TWE) share price crashed 43% lower in 2020
• My biggest regrets from 2020
• 2 ASX dividend shares with generous yields
• ASX 200 shares hardest hit by COVID-19 in 2020

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Treasury Wine Estates Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The value of total loan deferrals in Australia has fallen month-over-month to approximately $50 billion or 2% in November 2020 according to the Australian Prudential Regulation Authority (APRA)’s monthly disclosure on loan repayment deferrals. This compares to the peak of more than $250 billion or 10% in May 2020.  

Goldman Sachs has summarised its key takeaways on loan deferrals and the improvements it has observed in the big four ASX banks. We take a closer look.

Big four ASX banks analysis 

Westpac Banking Corp (ASX: WBC) currently has the most substantial share of deferrals, which can be explained by its large balance sheet, according to Goldman. 

Adjusting for balance sheet size, Australia and New Zealand Banking Group Ltd (ASX: ANZ) would appear to have the largest proportion of its loan book on deferral, sitting at 3%, down from 5% in October. National Australia Bank Ltd (ASX: NAB) has the least, with 1%, down from 3% in October. The Commonwealth Bank of Australia (ASX: CBA) sits in the middle with total deferrals of 2.5%. 

In the six months of available data, Goldman observes that NAB and Bank of Queensland Limited (ASX: BOQ) have seen the biggest net improvement in mortgage deferrals as a percentage of 31 May 2020 balances. 

Consistent with disclosure provided in its FY20 result, ANZ’s mortgage deferrals fell away significant back in October, but it still experienced the least improvement on this measure. 

Private credit growth steady in November 

The Reserve Bank of Australia (RBA) has also provided updates on private credit for November 2020. In the month, business lending momentum remained weak and was down -0.2% month-on-month (vs. -0.3% in September).

That said, on a year-on-year basis, lending growth is positive, up by 0.9% given the solid trends seen in March and April from efforts by corporates/SMEs drawing down credit to support cashflows amidst the COVID-19 disruptions. 

The update cited housing credit growth showing signs of life, increasing 0.3% month-on-month in November, while year-on-year growth remained unchanged at 3.4%.  

Owner-occupier growth remains the driver of total mortgage growth and was up 0.5% month-on-month in October, while investor lending remains subdued at -0.1% year-on-year. Personal credit remains very soft and was flat month-on-month with year-on-year trends running at -12.4%. 

Overall, private and housing credit growth has remained steady in November, which feeds into the recent recovery for the big four ASX bank shares.

More reading

• 2 ASX dividend shares with 6%+ yields
• Here are the US shares ASX investors are buying in 2021 so far
• Angry Tyro (ASX:TYR) customers jump ship
• Bank of Queensland (ASX:BOQ) share price touches 52-week high today
• ASX 200 down 0.4%: Afterpay tumbles, bank shares lower, gold miners crash

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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At lunch on Wednesday the S&P/ASX 200 Index (ASX: XJO) is on course to make it three days of declines in a row. The benchmark index is currently down 0.3% to 6,660.7 points.

Here’s what has been happening on the market today:

Premier Investments update impresses.

The Premier Investments Limited (ASX: PMV) share price is surging higher today. The catalyst for this has been an impressive trading update which included guidance for the first half of FY 2021. For the 27 weeks ending 30 January, the conglomerate expects its retail segment to achieve earnings before interest and tax (EBIT) of between $221 million to $233 million. This will be up between 75% and 85% on the 26 weeks ended 25 January 2020. Strong like for like sales and cost management have driven the stellar growth.

Altium sinks lower.

The Altium Limited (ASX: ALU) share price has come under pressure again on Wednesday. Investors have been selling the electronic design software provider’s shares after it revealed that COVID-19 had impacted its sales during the first half. As a result, Altium is expecting to deliver revenue of around US$89.6 million for the six months, which will be down 3% on the prior corresponding period. This morning analysts at Macquarie responded to the update by retaining their neutral rating but cutting their price target by 11.5% to $31.00.

Energy shares push higher.

One area of the share market pushing higher on Wednesday is the energy sector. The likes of Beach Energy Limited (ASX: BPT) and Santos Ltd (ASX: STO) are recording solid gains after oil prices pushed higher overnight. At the time of writing, the S&P/ASX 200 Energy index is up a solid 3.2% to 8,977.1 points.

Best and worst ASX 200 performers.

The best performer on the ASX 200 today has been the Premier Investments share price with a sizeable 14% gain. This follows the release of its update. The worst performer has been the PolyNovo Ltd (ASX: PNV) share price with a decline of 7%. Investors have been selling the medical device company’s shares following the release of a trading update this week.

More reading

• Why Afterpay, Altium, Mesoblast, & PolyNovo shares are dropping lower
• Why Oil Search, Praemium, Premier Investments, & Universal Store are storming higher
• Here’s why the Premier (ASX:PMV) share price just hit an all-time high
• Is the Altium (ASX: ALU) share price in the buy zone after its update?
• Here’s why the Universal Store (ASX:UNI) share price is surging 10% higher

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of POLYNOVO FPO. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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The Afterpay Ltd (ASX: APT) has taken a breather in recent weeks after running to an all-time record high of $123.40 on 18 December 2020. Despite the company’s ballooning valuation, big brokers are still edging their Afterpay share price targets higher. 

Recent breather for the Afterpay share price 

The Afterpay share price has been choppy in recent weeks, largely driven by movements in the broader market and tech sector. The company has not announced any market sensitive news or updates since 2 December 2020 regarding new monthly sales milestone in November. 

US politics has been a key driver of the heightened level of volatility in the tech sector. Last Thursday, the Democrats were poised to take control of the Senate, threatening increased regulation. 

The control of the Senate spells good news for incoming President Joe Biden’s agenda on issues including healthcare, the environment, government reform and the economy. Experts see this victory as a potential rotation away from tech shares into more cyclical sectors, similar to what the market experienced back in October and November last year. 

Brokers keen on Afterpay 

Citi is the first broker to upgrade its Afterpay share price target in the new year. The broker raised its price target from $97.75 to $115 with a neutral rating on Tuesday. 

Other brokers have yet to provide updates for Afterpay in 2021. 

Morgan Stanley previously retained an overweight rating with a $120 price target on 3 December 2020. The broker notes that Afterpay’s November sales were ahead of expectations and operations appear to be on track. 

Credit Suisse initiated coverage on 7 December 2020 with an outperform rating and $124 price target. The broker anticipates a strong growth outlook to underpin strong financial performance and investor returns. 

Goldman Sachs retained its neutral rating and $99.90 price target on December 7. There was no change in rating or target after reviewing the November milestone. 

Afterpay in 2021 

Afterpay has hinted at a few things that investors can look forward to in 2021. 

Its first steps into the rest of Europe is currently pending the approval from the Bank of Spain. The company’s acquisition of Pagantis in Europe will allow the company to launch into Spain, France and Italy immediately. 

Afterpay is also eyeing the South Asia market after establishing a base in Singapore. While no official plans are set, the company is looking to develop a strategy to enter this new market. 

More reading

• Why Afterpay, Altium, Mesoblast, & PolyNovo shares are dropping lower
• Afterpay and Creso Pharma were among the most traded shares on the ASX last week
• The biggest ASX bulls are about to get their faith tested
• ASX 200 down 0.4%: Afterpay tumbles, bank shares lower, gold miners crash
• Why the Afterpay (ASX:APT) share price has rocketed 250% in 12 months

Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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In morning trade the S&P/ASX 200 Index (ASX: XJO) is on course to record another decline. At the time of writing, the benchmark index is down 0.15% to 6,667.8 points.

Four shares that have fallen more than most today are listed below. Here’s why they are dropping lower:

Afterpay Ltd (ASX: APT)

The Afterpay share price is down 1.5% to $110.25. The tech sector has come under pressure again on Wednesday amid a rotation to value and cyclical stocks. This has led to the S&P/ASX All Technology Index (ASX: XTX) falling 1% today. On Tuesday analysts at Citi held firm with their neutral rating but lifted their price target on the company’s shares to $115.00.

Altium Limited (ASX: ALU)

The Altium share price is down almost 5% to $28.68. Investors have been selling this electronic design software company’s shares since the release of its first half guidance on Tuesday. This morning analysts at Macquarie responded to the disappointing update by retaining their neutral rating but cutting their price target by 11.5% to $31.00.

Mesoblast limited (ASX: MSB)

The Mesoblast share price has fallen over 5.5% to $2.45. This appears to have been driven by profit taking after some strong gains this week. The biotech company’s shares surged higher after it released a positive trial update. That update revealed that its rexlemestrocel-L drug provides a reduction in heart attacks, strokes, and cardiac death in patients with chronic heart failure.

PolyNovo Ltd (ASX: PNV)

The PolyNovo share price has fallen a further 7% to $2.75. The medical device company’s shares have come under pressure this week following the release of a trading update. Although that update revealed a 31% increase in first half sales, it would have been much stronger had its second quarter performance not underwhelmed. PolyNovo delivered a 75% increase in sales during the first quarter, but this was offset by the softening of sales in October and November.

More reading

• Why 1 broker thinks the Mesoblast (ASX:MSB) share price can run higher 
• Is the Altium (ASX: ALU) share price in the buy zone after its update?
• 5 things to watch on the ASX 200 on Wednesday
• ASX 200 drops lower
• Objective (ASX:OCL) share price continues its rise in 2021 after doubling last year

James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Altium. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of POLYNOVO FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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It has been an interesting 12 months for shareholders of ASX aerial imagery company Nearmap Ltd (ASX:NEA). After falling as low as 83 cents during the COVID-19-inspired sell-off back in March 2020, the company’s shares posted a valiant recovery, soaring to a 52-week high of $3.22 by late August.

But since then market interest in the company has waned, and the share price has slowly edged back down to $2.07. Shareholders no doubt will be hoping that Nearmap’s investments in its growth initiatives will translate to higher returns over the next few years.

What does Nearmap do?

Nearmap provides high resolution aerial images to business and government clients. It gives private companies and government agencies the ability to conduct virtual site visits without ever having to physically leave their offices. This allows people working in fields like engineering, infrastructure development, mining and construction to plan and analyse complex projects.

How has the company performed?

Nearmap’s FY20 financial results, released in August, were well-received by the market and helped push the share price up to its 52-week high. Statutory revenue jumped 25% year-on-year to $96.7 million, and Nearmap’s annualised contract value portfolio increased by 18% to $106.4 million.

The makeup of the contract portfolio also shifted favourably over the year: over half the portfolio was made up of premium content subscriptions, and 43% of contracts incorporated multi-year subscriptions. This meant that average revenue per subscription increased 11% year-on-year to $10,178.

Why has the share price declined?

That might leave you scratching your head and asking why, if the company has performed so well, its share price has declined so markedly since August.

There are a couple of potential reasons.

Firstly, Nearmap conducted a series of successful capital raisings since it released its results. In September, the company announced it had completed a $72.1 million institutional placement at $2.77 a share, a discount of 4.2% on the 9 September 2020 closing share price of $2.89.

Then, in October, it announced it had raised a further $23.1 million through a retail share purchase plan (SPP). Shares issued through the SPP were priced at just $2.30.

Each of these capital raisings diluted the share price, forcing it down.

Secondly, despite its strong revenue growth, Nearmap’s statutory loss after tax blew out during FY20 after the company made significant investments in various growth initiatives throughout the year. Nearmap’s loss increased from $14.9 million in FY19 to almost $37 million in FY20. The company’s earnings before interest, tax, depreciation and amortisation expenses also declined year-on-year, from $15.5 million in FY19 to just $9.1 million in FY20.

What is Nearmap forecasting for FY21?

In a market update released in November, Nearmap stated that it expected annual contract value for FY21 to be between $120 million and $128 million, representing year-on-year growth of between 13% and 20%. It also stated its intention to invest a further $10 million to $15 million in growth initiatives throughout FY21.

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Rhys Brock owns shares of Nearmap Ltd. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Nearmap Ltd. The Motley Fool Australia has recommended Nearmap Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post The Nearmap Ltd (ASX:NEA) share price is now 36% lower than its 52-week high appeared first on The Motley Fool Australia.

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