First came the cost cuts, now come the growth targets. Aveva, which develops engineering and industrial software, including for the oil and gas market and its suppliers, is impressing mightily on both fronts.
Six months after its merger with Schneider, of France, the business seems to be going from strength to strength. Its shares are highly rated and it’s not hard to see why.
Aveva, created in 1967 as a spin-out from the University of Cambridge, is a pioneer of 3D computer-aided design. It creates software that helps industry to execute processes and big projects digitally. It also makes the whizzy software that helps with simulations and designs.
It completed its reverse takeover of Schneider Electric in March, sealing a combination that had failed twice over the previous three years. Created to capitalise on the scale needed to pull in big industrial customers switching to digital technology, the group has more than 16,000 customers in sectors as diverse as chemicals, food and drink and life sciences and a workforce of over 4,400 people in 40 countries.
After telling investors in June that it was looking to achieve £25 million a year in cost savings by stripping out duplication and fine-tuning its research and development, Aveva chose yesterday to tell investors about its plans for growth.
First, Aveva said that it was aiming to increase medium-term revenues at least in line with the rest of the market, likely to be in the mid-single-digit percentages. That might not sound ambitious, but Aveva is also confident that its underlying software business will grow more rapidly than the rest of the market. As with its cost-cutting targets, the group is probably underpromising to overdeliver.
More obviously ambitious is its target of lifting its adjusted pre-tax profit margin to 30 per cent, from 23 per cent, in part by controlling costs but also through chasing higher margin business and improving the way in which its revenue streams work.
Which takes us to the heart of what Aveva plans to do. At the moment, a little more than 22 per cent of its earnings come from software subscriptions and rentals. A good deal more of it, not far off a third, comes from the one-off upfront payments that companies make to buy it and own it for life.
Yet subscriptions are considerably more profitable, generating a reliable recurring and, ultimately, a much higher revenue stream for Aveva, and a lower upfront payment for its customers. Aveva wants to increase the proportion of its revenues that are recurring from the present 52 per cent to more than 60 per cent over the medium term, which in practice means inside four years.
This shows how Aveva, which has been in the subscriptions business since 2001, is exerting its authority over the Schneider group, which had been in software since the 1930s and was heavy with revenues from one-off licence payments.
It may be that there will be some minor interruptions while Aveva sets about converting its existing customers to subscriptions and chasing new sales, but it’s hard not to conclude that they will be worth it.
Aveva shares, up 48p to £28.66 at the close, have put on more than 54 per cent since the Schneider deal was completed. Trading on a multiple of more than 37 times last year’s adjusted earnings, they are far from bargain basement in price. Strictly speaking, Aveva shares yield less than 1 per cent, but, in reality, the return is much higher because the company paid no interim dividend last year and instead distributed £10.15 a share in March.
ADVICE Hold long term
WHY An impressively run business that under-promises and over-delivers. The shares should improve steadily over time
Accesso Technology
Accesso is one of those high-growth technology stocks whose shares trade on earnings multiples that make you want to reboot the computer to check there’s not been a mistake. Based on last night’s closing price (up 25p on the day to £27.95), they are valued at just under 90 times last year’s earnings. At the moment, it reinvests its earnings and pays no dividend.
This is no Ocado, trading at an extraordinary 5,655 times earnings yesterday, or Amazon, more than 300 times, but it does beg an obvious question: are the shares worth it?
Accesso Technology began life 18 years ago as Lo-Q, a software business all about technology that could get visitors to attractions at theme parks and other venues straight to the front of the queue, for a fee. Under Tom Burnet, who joined as chief executive in 2010 and is now executive chairman, it still develops software to help queue-jumpers, but does a whole lot more. With customers including Merlin Entertainments, Seaworld and Carnival Cruises, it manages the whole ecommerce process on behalf of theme parks, museums, rock concerts, water parks and zoos, from selling the tickets to dealing with add-ons such as membership perks, food, valet parking, customised photographs and gift purchases. It is also highly acquisitive and has bought five companies over the past eight years.
Accesso’s first-half results yesterday showed strong growth: revenues were up 16.7 per cent at $54.4 million in the six months to the end of June. Pre-tax profit dropped by 12.5 per cent to $1.4 million, but this was distorted by one-off charges and adjusted pre-tax profits are a much more impressive $15.1 million, up 73.6 per cent.
What makes Accesso attractive is its established customer base, growth potential and permanent hunt for new markets, even healthcare (it has a patient management contract in the United States). As an indicator of its potential, Accesso has 40 per cent of the North American online ticketing market for theme parks, but a 5 per cent share in Europe and zero in Asia. The shares are a clear risk, but this company is looking increasingly like a winner.
ADVICE Buy
WHY Established in core markets, growing in others
