Sell slipping Aveva

Aveva, whose software is used by energy and engineering groups to test out designs, has been hit by weak spending in the oil and gas industry as energy companies have retrenched in response to falling oil prices. Together with the strength of sterling against a range of non-dollar currencies and its customers delaying projects in Brazil and South Korea, that led to Aveva's operating profit halving to less than £14m for the six months to the end of September.

Both initial and rental licence sales fell 27 per cent due to weak demand across the Americas and Asia Pacific, sending constant-currency revenues at Aveva's key engineering and design unit down 17 per cent. The challenges may not dissipate for a while: recent sanctions on Russia's energy industry threaten to dampen demand further, while management expects exploration and production spending to remain subdued over the next year as industry cost-cutting, headcount reductions and project delays continue. Moreover, it expects the global shipbuilding industry to be "flat at best" this year; the group's marine order book has shrunk five years in a row from 2008.

Aveva has restructured its sales teams to emphasise cross-selling, but the disruption weakened its first-half performance. Management plans to cut second-half costs by £10m, but claims that any further reductions could potentially damage long-term business prospects. That has left Aveva requiring a sharp recovery in demand according to broker Investec Securities. To meet consensus forecasts it must deliver 73 per cent of its full-year adjusted pre-tax profit in the second half, compared with an average second-half weighting over the past five years of 58 per cent.

The upshot is that broker Panmure Gordon expects Aveva's full-year pre-tax profit and EPS to tumble 23 per cent to £61m and 71.6p, respectively. Its shares currently trade at 18 times consensus next 12-month forecast earnings - a premium to better-placed peers such as Sage (SGE) on 16 times and Servelec (SERV) on 17 times. The group's weak outlook and a forecast yield of 2 per cent don't support that lofty rating.

Aveva has made some gains, too. Its latest modelling tool, Everything 3D, helped the group secure long-term deals with eight of its 14 global customers, expected to be worth £30m in incremental sales over the next five years. Moreover, strip out currency effects, and first-half usage fees, which it charges for ongoing use of its software, rose 12 per cent to £32m. And the group hopes to combat weak energy spending by targeting the burgeoning US shale industry.