Investment Column: Aveva may be strong but it is also pricey
Innovation; Hogg Robinson
Thursday 26 May 2011
Our view: Hold
Share price: 1,581p (+10p)
Aveva is not the best-known software company in the world. The man on the street, as we have remarked before, is more likely to confuse it with Aviva, the insurance group, than tell you that it is worth more than a £1bn.
The reason is that instead of cultivating home consumers, it focuses on big companies with its expertise in engineering software. In particular, it has an enviable position in the oil, gas and power markets.
Its strengths were plain to see in yesterday's full-year results. Revenues were up 17 per cent at £174m, while adjusted pre-tax profits came in at £54.7m, up from £50.7m last year.
The group said it had seen a particularly strong performance in emerging markets, and the oil and gas sector was the main driver of growth, accounting for around 45 per cent of total revenues.
Looking ahead, management struck a justifiably optimistic note, saying that the company was well placed to exploit opportunities both in emerging markets and in the more mature economies in the West. It was, then, no surprise when Aveva upped its dividend by 7 per cent.
The last time we looked at the group, we held back from buying, citing the somewhat expensive valuation of more than 25 times forward earnings. Numis now puts the stock on under 25 times, which is an improvement. There is also little doubt that this a strong business, with stellar prospects. There was nothing in yesterday's statement that would justify a sell recommendation.
But equally, while the results underscored the scope for long-term growth, they did not point to the kind of short-term catalyst that would make us buy despite the high multiples. We would, needless to say, not think twice about rushing in if the share price suffers a pullback in the coming months. For now, however, keep holding.
Our view: Buy
Share price: 18.5p (+1p)
Yesterday's half-yearly results prompted plenty of bullishness at Innovation.
The last financial year saw the small-cap software group radically reshape its business, and the figures certainly suggest that the strategy is working – and working well.
Beating analysts' expectations, the company's pre-tax profits for the period grew to £6.3m, a year-on-year rise of more than 150 per cent, while its revenues advanced about 12 per cent.
Innovation is built around its software for the insurance sector, with one part of its operations focused on selling those products. Another division is focused on winning outsourcing work from insurers, and it is this arm that appears to hold more promise.
After a multi-million pound investment in the software, the company seems to be reaping the dividends. In the past six months it has not only struck deals with Ford and Tesco but signed an agreement with an unnamed US insurer.
Innovation already operates in a number of countries around the world, and there is a strong belief that opportunities for organic growth are strong. Acquisitions are also seen as likely.
As we said earlier, the results certainly seem to validate the new team's approach, and although there is still a lot of work to do, Innovation looks like it's on the right track. That makes it a good bet, in our view.
Our view: Hold
Share price: 59.25p (+1.25p)
Hogg Robinson has been a star for this column, with our last buy recommendation in December working out well over the last couple of months. The question now is whether the business travel company will continue to glow.
To be sure, the strong interim performance has continued through to the full year. Full-year pre-tax profits were up 16 per cent to £33m on revenue of £358m, up 10 per cent. Debt is down, so is the pension deficit, while the dividend is up 25 per cent.
Second-half margins are off a bit – though they are up year on year – because the company took on staff to maintain service levels. But productivity has improved.
Hogg's business is still very much centred on Europe. However, it has the financial clout to expand, and management are targeting America and Asia, if suitable "bolt-on" acquisition opportunities arise.
Trading on just over seven times next year's forecast full-year earnings, the shares remain keenly priced and business travel is still growing into a recovering global economy. Hold for now but buy again on any weakness.
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