Investment Column: Hold on to Aveva's long-term growth
Punch Taverns; Asos
Wednesday 13 October 2010
Our view: Hold
Share price: 1401p (+10p)
The man in the street is unlikely to be intimately acquainted with Aveva Group, and confusion may even lead him to wonder why an insurer from Norwich is involved in building nuclear power plants. Yet Aveva (nothing to do with the insurer Aviva) is a UK engineering technology success story, currently among the largest 350 listed companies in the country.
The group produces software that helps a range of industries design industrial plants and capture and maintain their data. Its systems have been used by big players in the oil and gas markets, the power industry and even ship designers.
Yesterday's first-half numbers did not lead to any surprises. The company is making progress in shifting into the emerging markets, particularly fast-developing economies such as Brazil, China and Russia, as operations in Western Europe and North America slow. The general message seemed to be "steady as she goes" with rental fees holding up, maintenance fees steady and licence fees up slightly. Market conditions are stable and the company is in good shape. Oil and gas is "positive" the group said, with power "stable". The disappointing arm for the business is marine, which was described as "slow".
Analysts point to significant opportunities for the company in the long-term. Panmure Gordon pointed out that of the world's 436 nuclear plants, almost half are in the last decade of use, fuelling maintenance spending and new projects. Investec analyst Julian Yates rated the company's price at 25.6 times his estimated full-year earnings, although he expects it to fall to 18 times in 2013. That price looks high, but we think the stock is worth holding on to as this is a quality business that should grow long-term.
Our view: Avoid
Share price: 80.5p (-9.9p)
Punch's shares have recovered somewhat since dipping below the 60p mark in the summer. But yesterday they hit the skids again and we are more than happy with our sell advice at 96.65p last year. Yesterday's results statement had the look of a company desperately scrambling for positives.
So the headlines highlighted that the company is making money: £131m of pre-tax profits, although that swiftly becomes a £160m loss after £253m of write-downs, largely on the value of Punch's pubs. It's true that debt has been reduced by £322m, that what remains has an average maturity of 17 years, and that the company boasts a net asset value per share of 229p. The problem is that debt, which at £3.1bn is still mountainous, and that Punch still faces horrible difficulties.
There are too many poorly performing pubs, too many smaller, drink-dominated outlets, too many economic problems, too much tax. There is too little room for manoeuvre for a business which is struggling and will continue to struggle as the Government's cutbacks bite. The response of the consumer to those cuts is simple: they'll simply head down to Tesco.
Punch plans another 1,300 pub sales, and its new chief executive, Ian Dyson, promises a root-and-branch review. We wish him luck, because we can't see how he can plug the multitude of holes in this Titanic. Some might be tempted to buy Punch as a recovery play: it trades on a measly 6.3 times full-year forecast earnings (stripping out exceptionals). We disagree. Mr Dyson needs to unveil something miraculous for us to change our stance. Avoid.
Our view: Buy
Share price: 1153P (+3p)
Asos divides opinion. On the one hand, you have the bulls, who buy the business story of strong growth and endorse the shares, despite the hefty multiples they trade on. But another group – while they like the Asos story and believe in the promise of further growth in the UK and elsewhere – shudders at the thought of buying into a stock which, on Panmure Gordon's estimates, trades on multiples of more than 46 times 2011 forecast earnings.
Ordinarily, we'd be with them. Such a valuation says it's time to take profits, regardless of the online fashion retailer's growth prospects. Others could easily get the same idea and take the shine off the shares. But this is no ordinary stock. Asos is uniquely positioned in the online fashion market, and the shares could easily hold up as it continues to deliver on the business side. Even they suffer some short-term weakness as investors book gains, a bidder could take advantage.
The company is often linked to supermarkets – and some even fantasise about interest from Amazon, the giant of the online shopping world. We'd be happy with either scenario emerging after Thursday's trading statement. Buy.
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