Targets can be spurious things. Set them too low and the world will be unimpressed that they’ve been reached; set them too high and it will be disappointed if they’re undershot. Aveva seems to have achieved a happy balance, setting the bar high and then overdelivering — doing so, indeed, in such a way that its shareholders are pleased with what they get but are still left wanting more.
The company develops engineering and industrial software for use in every area of manufacturing and production, in sectors ranging from oil and gas to food and drinks. It was spun out of the University of Cambridge in 1967 and is known for being a pioneer in 3D computer-aided design and simulation. A member of the FTSE 100 with a market value of just under £7.3 billion, it made a pre-tax profit of £46.7 million on revenues of £766.6 million in its financial year to the end of March.
Aveva’s growth has been propelled by the increasing trend among the world’s big industrial companies to digitalise their processes and thus become more operationally efficient, safer and more competitive. Historically, its investors fretted that it was overexposed to the oil and gas markets, but that changed just over a year and a half ago in the wake of its transforming reverse takeover of Schneider Electric, a rival, which has considerably diversified its revenues. The combined group also has been shifting its earnings model from one based on one-off licence sales to a more stable and predictable pattern of monthly subscription payments.
Which brings us to the growth targets, set shortly after the deal went through. First, Aveva said that it was aiming to increase its revenues over the medium term at least in line with the wider industrial software market, a mid-single-digit rise that marked the group’s least ambitious target, although it said that it did expect its underlying software business to outpace that benchmark.
Needless to say, the group has beaten the target, most recently delivering an 11.9 per cent increase in revenues over the six months to the end of March in spite of warning that the process of changing its model might hold it back temporarily.
Next, it said that it was aiming to make 60 per cent of its revenues recurring — based on subscriptions rather than licences — over four years. Aveva has smashed that ambition comfortably early, with recurring revenues at 61.9 per cent over the six-month period, up from 50.7 per cent at the same point the previous year.
It is also on course to hit its goal of having an adjusted pre-tax profit margin of 30 per cent — the figure came in at 23.1 per cent, up from 16.2 per cent over the comparable period last year. Given its track record, it would be unwise to bet against it achieving that in short order.
Aveva’s shares, already highly rated, have been boosted by its success. Although off 8p, or 0.2 per cent at £44.94 yesterday, the price has climbed by nearly 58 per cent since this column last recommended holding them a year ago in September, and that was after a similar rise over the preceding six months.
The shares are valued at 42 times JP Morgan’s forecast earnings and carry a dividend yield of just over 1 per cent. Bearing in mind the value created and with the shares approaching some analysts’ price targets, it would be understandable if investors wanted to take some money off the table and crystallise a profit. The wise among them would probably keep back some of their holding, as a company of this quality probably still has plenty more to give. Credit Suisse recently predicted that the shares could go to £50.
ADVICE Take (some) profits
WHY Price has doubled since reverse takeover and is close to some analysts’ targets, but may have further to go
Cranswick
No disrespect intended, but Cranswick shouldn’t be doing as well as it is. This FTSE 250 company is after all a specialist in producing pork and poultry in a world where people are eating less meat and vegetarian and vegan are no longer fad words, no? Well, not quite.
Cranswick was founded in 1975 when a group of 23 farmers in East Riding, Yorkshire, came together to produce pig feed under the name Cranswick Mill. The company specialises in producing premium-end pork, bacon, gammon and chicken and sells its meats to all of the main supermarkets with the exception of Waitrose, which has its own, single supplier.
A quarter of Cranswick’s pork and all of its chicken is produced on its own farms and, while it mainly serves the UK market, it exports about 9 per cent of its produce. In an illustration of the strength of its trading, the group is investing £75 million in a new poultry processing factory in Eye, Suffolk.
And why the success? In part it’s because, while our dietary habits are changing, meat trends are nuanced. Cranswick’s predominantly white meats are healthier, cheaper and more resilient than others. According to figures from Kantar Worldpanel, sales of chicken and pig meats rose in the year to early October, while the red meats of beef and lamb declined.
At the same time, Cranswick is more than just pork and chicken: it has a continental arm that produces delicatessen-style products including olives, cured meats and charcuterie and earlier this year it spent up to £50.5 million buying Katsouris Brothers, a London-based firm that supplies pasta, nuts, oils and dressings under the Cypressa brand.
Less fortunately, there is also African swine flu, the outbreak of which has decimated swathes of Asia’s pig population and is expected to boost Cranswick’s exports for years.
The shares, up 8p, or 0.3 per cent, to £30.98, have performed creditably well, in part driven by higher prices in China. Trading at 22 times Liberum’s forecast earnings for a dividend yield of just over 1.8 per cent, they look well valued for now, but may be worth revisiting when the factory investment has worked its way through.
ADVICE Avoid
WHY Fairly valued for a business investing heavily as diets change
