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Aveva needs to slow before it can grow

Investment in cloud will hit next year's profit but accelerate the transition to a recurring revenue model.
June 8, 2022
  • Cost saving synergies from OSIsoft deal
  • Rising wage inflation being passed onto customers with price rises

Aveva (AVV) sells software to industrial businesses to allow them to better interpret the data coming out of their facilities. Traditionally, most of its revenue came from the energy sector but the acquisition of OSIsoft for $5bn (£3.7bn) last year has given Aveva access to a wider range of industries. Good news, given the likely long-term decline of oil and gas.

The company is going through the same transition as lots of software companies: the switch to cloud. This switch is expensive and requires a lot of investment in R&D and sales. Coupled with the war in Ukraine and rising wage inflation this means broker Numis is expecting Aveva's medium-term prospects to look like a “J curve”.

That means a small drop in profits in 2023 followed by a  sharp move upwards in 2024 and 2025. The main driver of this growth will come from annual recurring revenue acceleration, the group is aiming for 15-20 per cent growth in 2023, and price increases along the way. It has already implemented increases in April and will continue to do so as more contracts come up for renewal.

The reason for the expected profit drop next year is that £20mn of R&D investment in the cloud is being pushed forward to 2023. This was already planned but Aveva wants to expedite matters. ARR growth was 10 per cent last year and the acceleration of investment should help it hit its 20 per cent growth forecast faster than expected.

The other feature that should drive this J curve shape is the cost savings generated from the OSIsoft acquisition. Management is expecting cost synergies of no less than $30mn in 2023 and expects this to rise to at least $100mn by 2026. That is significant and should help it boost its operating margin from 29.5 per cent last year. Numis thinks it will be 31.6 per cent by 2025.  

If all of this strategy works as Numis and Aveva expect then it looks good value. The broker currently has it on a 2025 PE of 15.2 which looks affordable for a (potentially) high growth software business.

The good news for investors is that Aveva seems to have a decent amount of pricing power. And as it is also not a consumer facing business it should be fairly well buffeted from the cost of living crisis. Long-term buy.

Last IC View: Buy, 3,452p 10 Nov 2021

AVEVA GROUP (AVV)   
ORD PRICE:2,327pMARKET VALUE:£7.02bn
TOUCH:2,327-2,330p12-MONTH HIGH:4,242pLOW: 1,800p
DIVIDEND YIELD:1.1%PE RATIO:na
NET ASSET VALUE:1,727p*NET DEBT:10%
Year to 31 MarchTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20180.4934.539.927.0
20190.7746.721.043.0
20200.8392.043.044.5
20210.8234.211.423.5
20221.19-18.6-20.824.5
% change+44--+4
Ex-div:07 Jul   
Payment:05 Aug   
*Includes intangible assets of £5.48bn, or 1,815p a share.