Interactive Investor

Aveva Group promises big things after these results

25th May 2021 08:17

Richard Hunter from interactive investor

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Last year was a struggle for many companies, but Aveva has reason to be optimistic.

Looking through the disruption caused by the pandemic, software maker Aveva Group (LSE:AVV) is well positioned within its specialised sector.

Revenues for the year slipped just 1.6% in the year to March, which is something of a recovery given the 12% decline reported at the half-year stage. Overall pre-tax profit was sharply lower, however, with the general uncertainty of the pandemic weighing on customer spending decisions, and increased expenses.

At 35% of revenues, the Energy unit was particularly affected by the volatility of oil prices in the period. Indeed, the main cloud on the current outlook is the overhang of any further pandemic disruptions while, on a historical valuation basis, the shares are not obviously cheap.

However, the transformational $5 billion acquisition of US company OSIsoft is a strong strategic move. It will extend the list and improve the industry and geographical diversity of its customers, while also providing cost synergies. Most importantly, though, Aveva sees the deal as providing more meaningful revenue opportunities, especially cross-selling possibilities since the strengths of the two companies are largely complementary.

Indeed, combining the performance of the two previously separate companies over the last year paints a rather different picture, with revenues ahead by 2.2% and adjusted profit by 13%.

In addition, Aveva is following the path of a move to subscription rather than licence fees, giving earnings more predictability and visibility, and the latest improvement sees recurring revenues now accounting for 68% of the group total.

The company has also confirmed a small increase to the dividend, which it has paid throughout the crisis, although a yield of 1.1% is not a compelling attraction on income-seeking grounds. 

Aveva has noted that the new financial year is off to a positive start, with largely normalised trading conditions. This should play well into Aveva’s strength in an unquestionably growing arena. Companies are increasingly looking to digitalise their offerings and operations, thus reducing capital and operating expenditure, through use of the likes of the cloud, AI and the Internet of Things. The software engineering and design which Aveva provides, let alone the additional firepower from the OSIsoft acquisition, is ideally suited to such aims.

In what has been an exceptional year, both in terms of the acquisition and the wider environment, the shares have added just 2%, as compared to a gain of 16% for the wider FTSE 100. Longer term holders, however, have been rather more handsomely rewarded with a share price hike of 21% over the last two years, and 72% over the last three. 

Investors are clearly anticipating the OSIsoft deal to provide significant opportunities, with the market consensus of the shares coming in at a 'strong buy'.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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