What’s new:
■ Demand patterns stabilising making future revenues more predictable
■ Takeover of rival Intergraph implies consolidation is back on agenda
■ Intergraph deal highlights Aveva’s high premium rating
Industrial software developer Aveva is still being dogged by difficult trading conditions in the US, a region which accounts for about a fifth of its revenue. Demand appears to be stabilising though, with oil and gas and power markets reasonably robust, providing greater sales visibility. And last month's acquisitions of Logimatic and ADB should both become neatly tucked into Aveva’s business over the next six months, while the company also reports a strong pipeline in Aveva Net, its web-based engineering applications platform.
Arguably more telling, however, is the $2.1bn (£1.4bn) takeover of one of Aveva’s chief rivals, Intergraph, by Swedish measurement technologies business Hexagon. This shows that the engineering software industry has stabilised to the extent of putting consolidation back on the agenda. Aveva has long looked like a consolidation candidate from either trade or financial buyers, but investors chasing its shares on this basis should note its valuation remains a major sticking point.
The shares currently trade on 22 times earnings estimates for the 12 months to March 2011 and the company is being valued on an enterprise value (net debt and market value) to cash profits multiple of 12. That’s well above the software sector PE ratio of 15, and it also represents a hefty premium to the 10.3 times enterprise value:cash profits multiple paid by Hexagon for Intergraph.
Panmure Gordon says…
Buy. Aveva’s first-quarter trading update was short and sweet, as expected, with no operational change from final results and trading in line with expectations although Intergraph promises to present an even bigger threat to Aveva’s US ambitions after getting fresh ‘oomph’ from a new owner. However, Hexagon’s acquisition also clearly illustrates that the industry sees value in the engineering design segment and Aveva’s superior margins, growth and geographic exposure are key shareholder value drivers, even though the Intergraph take-out price is below Aveva’s current valuation.
Canaccord says…
Hold. We believe Hexagon's ownership of Aveva's largest competitor, Intergraph will mean stronger competition, bringing together Hexagon’s leading geospatial data capture with Intergraph’s geographical information systems and computer-aided drawing software. Talking up synergies on both sales and operating costs, this looks a good fit for Hexagon, and a potential slap in the face for Aveva. The exit multiple equates to about 10.2 times Intergraph’s 2010 cash profits, which compares favourably with Aveva's current valuation of more than 10 times 2010 cash profits. Our middle-of-the-range 2011 EPS estimate of 56.6p implies the shares, at 1254p, are trading on a PE ratio of 22, a hefty rating they may struggle to maintain in the medium-term. We set a 1,050p price target for the stock, 16 per cent down from the current share price.
