Market Report: Aveva wobbles amid valuation concerns

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The Independent Online

Valuation concerns weighed on Aveva last night, with the bears moving in on worries that the software group's shares could be discounting too much in the way of earnings upgrades.

UBS sparked the concerns, labelling Aveva, whose applications are used to design everything from oil and gas facilities to power stations and ships, "Europe's most expensive software stock". Compared to other companies under its coverage, the broker said Aveva was trading at a 51 per cent premium to peers. At the same time, it is valued at a 31 per cent premium to its own historic metrics in terms of price to forward earnings.

"Sensitivity analysis suggests that on current consensus forecasts, Aveva is pricing in at least 40 per cent upgrades to forecasts... Even assuming a 20 per premium to the stock's historic average... the current price seems to be discounting 20 per cent [in] upgrades," the broker said, switching its stance to "sell".

Though Aveva is seen as a possible candidate for deal activity – it features in the broker's mergers & acquisitions watch list – this also appears to be reflected in the price."We note that peer Intergraph was bought for 11 times historic Ebitda [earnings before interest, tax, depreciation and amortisation]," UBS added, aiding the stock's decline to 1,402p, down more than 5 per cent or 78p. "Aveva is at 14.5 times on the same basis – seemingly already more than pricing in the risk of a take-out."

Overall, the markets were strong, with the FTSE 100 index rallying to 5,494.16, up 1.2 per cent or 64.42 points. The mid-cap FTSE 250 index was also higher, swelling by around 1 per cent, or 108.99 points, to 10,325.7.

The move up was pinned on better than expected economic data out of the US, with the trade deficit narrowing by more than forecast in July and weekly figures on the number of Americans filing new claims for unemployment benefits declining to their lowest level in two months.

The data triggered a bout of confidence in the world's largest economy, driving the mood across the mining sector. Equities rose as fears of a step down in US demand receded, lifting the likes of Xstrata, which gained 36.5p to 1,138.5p, and Rio Tinto, which shook off uncertainty about Australian plans for a mammoth tax on mining profits to close at 3,540p, up 69.5p. Kazakhmys was also ahead last night, adding 18p to 1,295p, while Antofagasta rose by 11p to 1,120p.

Over in the banking sector, Barclays, which has been held back in recent sessions, mounted a comeback, rallying 15.35p to 323.35p on reports that international regulators meeting in Switzerland this weekend were likely to agree on a better-than-feared norm for banking buffers. The wider sector was also higher, with the Royal Bank of Scotland, for instance, drawing on similar factors to close at the top of the FTSE 100, up 2.3p to 48.15p.

State-backed peer Lloyds, up 2.35p at 74.67p, was boosted by some comment from UBS, which said the lender was among a select group that now looked "increasingly overcapitalised". "We think the need to demonstrate undoubted capital strength to exit the [UK Government's] Asset Protection Scheme led Lloyds to raise as much as £9bn more equity than needed at the end of 2009," the broker said. "With the capital intensity of its business falling and profits rising, we believe excess capital will soon become a pressing issue."

Further afield, Hays, the recruitment group which was first mentioned as a bid target on Wednesday, remained strong as speculators revisited the prospect of deal activity. Peers Adecco, which has previously tried to acquired UK-listed Michael Page International, and Randstad, which has been linked to Hays in the past, were mentioned as possible suitors, helping Hays rise by another 2.3p to 105.1p. Michael Page was also strong, closing at 431.8p, up 12.2p, last night.

On the downside, Game, the video games retailer whose relegation from the FTSE 250 was confirmed in the index review released after the close on Wednesday, fell by 1.55p to 71.9p on the read-across from HMV and Argos-owner Home Retail Group, both of whom fell after issuing trading updates. HMV was 10.9 per cent, or 7.25p, lower at 59.25p, while Home Retail, which will leave the FTSE 100 when the results of the reshuffle are implemented later this month, saw its shares decline by 6.2p to 215.2p.

Credit Suisse aided Fenner, the industrial conveyor belt-maker, which rose by 11p to 228p after the broker adopted a positive stance in a review of UK capital goods stocks. The broker was also keen on Halma, the safety equipment group, which rose by 12.1p to 294.6p, and Spirax-Sarco Engineering, which gained 29p to 1,675p.

"We believe the market has historically underestimated both the quality and the implied valuation of a number of UK capital goods stocks," the broker said, adopting an "outperform" view on Fenner, Halma and Spirax-Sarco. Elsewhere, Credit Suisse was more cautious, and adopted an "underperform" stance, on Morgan Crucible, the industrial materials firm which slightly higher at 205.2p, up 1.3p, and Laird, which edged up by 0.3p to 135p.

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