It is not entirely clear why shares in Aveva, the maker of software for big engineering projects, should have taken such a tumble yesterday. The outlook, as expressed in the full-year figures, is not much different from the trading update just a month ago. The question is when, or if, the oil and gas work which provides 40 to 45 per cent of revenues will eventually come back.
There are signs of some recovery, as the big oil companies begin to adjust to a price of $50 a barrel or more and turn on the capital spending taps again. Any new projects should eventually feed through into work for Aveva. There is, however, no sign of any recovery in the important Brazil market, and the continuing political uncertainty there would seem to push this further back. For the year to end-March revenues across the group were down by 3.8 per cent, though given the boost from the lower pound they were up 7 per cent to £215.8 million on a reported basis.
The second half saw some improvement, a decline of 2.1 per cent and entirely down to a fall in Latin America. Aveva is trying to build up work elsewhere, in the power industry, in North America generally and among owner operators of big projects who have the say over which software is used.
Sales of E3D, its latest suite, were up by 35 per cent, and about a quarter of existing customers have been switched to this. Costs are under control and about 77 per cent of revenues are now on a recurring basis. Those are the main positives, and the company admits that it is hard to predict any return in demand in its core markets, leaving the shares to fall 98p to £19.45.
They are pretty much up again to where they were in the summer, when the last bid talks with Schneider Electric of France ceased. There is undeniably a degree of bid premium still in the shares, but a further approach seems unlikely. The other imponderable is what will happen to the growing cash pile, £131 million at the financial year end.
Aveva has talked of doing deals of its own but the last one was more than two years ago and there is not a lot around. Some of that cash will probably come back to shareholders in due course, but for now on almost 30 times’ earnings the shares look fully valued.
My advice Avoid
Why The core market will take time to come back and the shares are on a high rating which would seem to include unwarranted bid premium
Big Yellow Group
There are two ways of looking at investments such as Big Yellow Group, the owner of those hard-to-miss properties for temporary storage. One, that the emphasis on new housing will make it increasingly difficult to find new sites, especially given its concentration on the southeast. The company admits that this will be a constraint on future growth, as the legacy sites bought before the economic downturn have now been built out.
Two, that the existing estate is therefore becoming more valuable as London continues to grow and the market is undersupplied — “irreplaceable”, as Big Yellow says. Certainly, trading over the past few months has been better than had been expected. Future growth is therefore more likely to come from increasing the occupancy rate, now set to break through the 80 per cent level this summer and heading for the long-time target of 85 per cent.
For investors, the key is the dividend yield. The shares, off 3½p at 794½p, are trading at a couple of quid above the net asset value and are starting to look a bit pricey. With a forward yield of 3.6 per cent, there does not seem to be a lot to go for.
My advice Avoid
Why There is better dividend income in the sector
Greencore
The $747.5 million purchase by Greencore Group of Peacock Foods in the US was a significant step, requiring a £427 million rights issue, on a nine-for-13 basis, and taking on $249 million of bank debt. It was also a leap into the unknown: Greencore was highly thought of for its UK and Ireland sandwiches operation but Peacock brought $1 billion of turnover and created a business that now has approaching half its revenues from across the Atlantic.
No surprise, perhaps, that Greencore shares have been subdued since the start of the year, when they stood at about 250p. They rebounded yesterday, up 16½p to 243¾p, on a set of results that reassured nervous investors that the acquisition was going well enough. Total volumes at Peacock were up by 9 per cent over the first half to March 31, the best measure of performance, contributing to a 46 per cent rise in group revenues.
In the UK and Ireland, the build-up of the food-to-go business, after the acquisition of the Sandwich Factory last summer, sent revenues ahead by 10.6 per cent on a strictly comparable basis even if margins slipped back because of the extra investment. Greencore has given reassurances that it is coping with the inevitable commodity and wage cost inflation with the expected £25 million from the former this year due to be passed through to customers. The shares sell on 16 times earnings. This does not look especially cheap but seems justified because of the added potential from Peacock.
My advice Buy
Why Benefits of US deal not yet in the share price
And finally . . .
Assura is yet another of those property companies that recycle rental income as dividends for shareholders. This model has come to prominence at a time of low interest rates and a lack of income elsewhere. Assura is a bit larger than the other specialist in buying and renting doctors’ practices, Primary Health Properties. Any uncertainty since the referendum does not seem to have affected the business, with net assets up 7.6 per cent in the year to March 31, dividends up 9.8 per cent and a yield of 3.8 per cent.
