Why Aveva is a top ESG fund manager favourite

As a leading industrial software group, Aveva provides a portfolio of products that cover an asset’s entire lifecycle, from engineering, to monitoring and control, to performance management. Such products help businesses to cut their expenses, improve efficiency and lift productivity – while also enhancing safety levels.

In March 2018, Aveva completed a reverse takeover of French company Schneider Electric’s software wing. On the one hand, the deal strengthened Aveva’s presence in its main sector by sales – oil and gas. But on the other, it helped to reduce the group’s dependence on this sphere, by diversifying its end markets, adding dominant positions in the likes of food and beverage, pharmaceuticals and waste water.  

While integration has progressed well since the deal’s completion, Aveva has also made encouraging headway on its medium-term financial targets outlined in September 2018. These include an aim to grow constant-currency revenue at least in line with the growth of the broader market; to increase its adjusted operating margin to 30 per cent; and to grow recurring revenues to over 60 per cent of total sales – an objective that should bring greater visibility. To the latter point, Aveva is working to grow software revenue faster than lower-value services revenue (18.6 per cent of first-half sales). It is also looking to increase rental and subscription revenues from software over initial and perpetual licences. While subscription sales deliver less upfront, Aveva believes that not only are they preferred by customers, but they also provide more reliable revenue streams and over 10 years have a net present revenue value that is at least 50 per cent greater than a standard perpetual licence and maintenance deal.

The group had said that these initiatives would negatively impact shorter-term sales growth, with a view to bolstering margins and cash generation in the long term. But performance was strong during the six months to September 2019. Overall revenues rose by 16.5 per cent to £392m – above the industry growth rate – while the adjusted operating margin escalated from 16.2 per cent to 23.1 per cent. Meanwhile, recurring revenues climbed by 42.1 per cent to represent 61.9 per cent of the total. Broker Panmure Gordon thinks targets could be substantially exceeded, and thinks operating margins of 40-45 per cent could be achievable in the long term.

The progress has led to a slew of broker forecast upgrades over the past year (EPS forecasts have been increased by about 12 per cent over the past 12 months) and strong share price momentum. This has made Aveva a top idea generated by our IC Alpha momentum screen, and it also appears in this week's stock screen column. Top fund managers think there could be much more to come. 

At its last portfolio disclosure, Aveva was the largest holding of the ASI UK Responsible Equity Fund, which boasts performance in the top tenth of all UK equity funds over both one and three years. The fund's manager, Louise Kernohan, views the deal as "very attractive", bringing both a “highly complementary" business and technology too. Ms Kernohan notes that the discount to European and US tech peers at which Aveva shares traded before the Schneider deal has disappeared. Indeed, the forward PE of over 40 is high, reflecting investors' willingness to pay up for subscription software companies with strong competitive positions. But, Ms Kernohan points out, “when we look at consensus earnings forecasts, they still look too low. The management has still really only scratched the surface of what they can get from the merger. There’s years of potential revenue synergies to come from that”. Aside from the merger, she also cites structural growth in Aveva’s end markets.