ii view: UK software maker Aveva confirms Covid hit

Covid is hurting, but with a $5 billion US acquisition targeted, should investors be looking beyond?

First-half trading update to 30 September

• Revenue down 12% to £333 million

ii round-up:

Industrial software maker AVEVA Group (LSE:AVV) has outlined a 12% fall in first-half revenue to £333 million as disruption from the Covid-19 pandemic impacted business. 

Aveva's software helps drive efficiency gains for the industries it serves such as oil & gas, petrochemicals, mining, paper and pulp and food production.

Group customers such as those in the oil and gas industry have been cutting costs including non-essential software spend as Covid-19 reduced energy usage under government lockdowns and work from home guidance. 

Aveva shares fell by 5% in UK trading with the revenue decline marginally worse than analyst expectations, although its shares are up by nearly 50% since late March pandemic lows. Its customers include BP (LSE:BP.), Abu Dhabi National Oil Company, Hyundai Heavy Industries, Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) and semiconductor company Micron.

The Cambridge headquartered company pointed to a strong order pipeline for the rest of the year, underpinned by a higher volume of contract renewals. This includes major global account contracts, as well as contracts that slipped from the second quarter. Management therefore expects solid second-half revenue growth and remains confident for the full year.

In August, Aveva agreed to buy US-based real-time industrial data software and services provider OSIsoft for $5 billion (£3.85 billion). Aveva’s $250 million debt refinancing with its banks has now been completed and the timetable for the acquisition remains on track.  Further details of a previously proposed $3.5 billion (£2.7 billion) shareholder fund raising, or rights issue are expected in November.

OSIsoft's product is used by its customers across 14,000 sites in 127 countries. OSIsoft works with over 1,000 of the world's leading power and utilities companies, 38 of the global fortune top 40 oil & gas companies, along with numerous mining, petrochemical and pharmaceutical companies. 

Aveva's first-half results are scheduled for 5 November.

ii view:

Aveva operates across the four areas of engineering, monitoring & control, asset performance management and planning & operations. A previous merger with Schneider Electric’s industrial software business helped extend the list of customers and improve industry diversity. OSIsoft will do the same. 

For investors, its goal to improve the productivity of its industrial customers remains an attractive one. A broad portfolio of software solutions spans the entire operational life cycle of many of the world’s major industries. A move away from licence fees to subscription fees should also enhance its predictability, helping to underwrite shareholder returns such as its ongoing dividend – the payment of which has continued to date through the Covid crisis. 

But Covid-19 has increased uncertainty. Disruption to varying industries including oil & gas and mining has been seen. A proposed fundraising, or rights issue has yet to be completed and an estimated forward price/earnings ratio (PE) in the 40’s is comfortably above both the three-and 10-year averages – suggesting the shares are not obviously cheap. For now, while long term prospects still look enticing, some near-term caution appears sensible.

Positives: 

• Diversity of customers and geographical locations
• Purchase of OSIsoft expected to enhance earnings

Negatives:

• Ongoing Covid-19 uncertainty
• Forward Price Earnings valuation above the 10-year average

The average rating of stock market analysts:

Strong hold