The last time this column looked at Aveva in December, it recommended that investors bank profits and offload some of their holdings in the industrial software developer (Miles Costello writes).
The shares have since fallen by just over 10 per cent, in no small part thanks to yesterday’s reported sharp drop in first-half profits, which pushed the price sharply lower.
It’s hardly a stunning piece of prescience, though. No one could have predicted the onset of the coronavirus and the disruptions to industry that it would cause. And, relative to much of the rest of the market, the group’s shares have fared extremely well. Is it time to buy back in again on the weakness?
Aveva was spun out of the University of Cambridge in 1967 and, although the company is known for its pioneering work in 3D computer-aided design, it develops engineering and industrial software for use by most types of manufacturing and production businesses, from steelmakers and miners to food and drinks suppliers. With a market value of about £7 billion, it is a member of the FTSE 100 index and it made a pre-tax profit of £92 million on revenues of £833.8 million during the 12 months to the end of March.
As well as being noteworthy for its high stock market valuation, the group is also recognised for the success of its transforming reverse takeover of rival Schneider Electric in a £3 billion deal just over three years ago that substantially diversified its earnings profile after a previous over-reliance on oil and gas.
The effects of the global pandemic on Aveva’s business activities have been relatively modest. With governments pushing economies into lockdown in the early months of the year, the crisis will obviously have meant that some of its customers have closed, putting decisions to digitise their operations on hold. That was in part behind a 15.1 per cent drop in revenues to £332.6 million over the six months to the end of September, though Aveva won a large contract over the same period last year so the comparable number was considerably higher.
Despite the apparently poor headline numbers, Aveva said yesterday that demand among customers had held up well. It said that its book of orders for the second half was strong and that it was confident of hitting its targets for the full year; it maintained its interim dividend flat against last year’s payment at 15.5p.
Aveva was also upbeat about its proposed acquisition of Osisoft, a specialist in real-time industrial software, for $5 billion including debt. The group is part paying for the acquisition through a $3.5 billion rights issue.
Aveva has much to do in the second half if it is to meet City forecasts. Analysts at Stifel are looking for full-year revenues of about £786.4 million and adjusted profits before tax and other items of £230.3 million. Aveva’s adjusted earnings for the first half were just £56.3 million and acquisition and integration costs for Osisoft pushed it into a statutory pre-tax loss.
Nevertheless, this is a business that tends to more than deliver on its promises and the arrival of Osisoft and several contracts that failed to come through in the first half should help. Yesterday’s sharp drop in the share price, down 255p or 5.8 per cent to £41.62, feels like an overreaction but makes them feel cheaper.
The rights issue is likely to put some short-term pressure on the shares, which trade at a demanding 40.9 times Stifel’s forecast earnings for a dividend yield of just 1.1 per cent. For those prepared to pay for quality, this could be an opportunity.
Advice Buy
Why High quality, increasingly efficient company, locked into the long-term trend among business to make processes digital
Tate & Lyle
In this most surreal of years, at least one fundamental persists: consumers still consume (Callum Jones writes). However, the pandemic has altered how and what people consume, just how much and, crucially, where they do it.
These vast shifts, which in many cases happened almost overnight and show little sign of switching back, matter immensely to companies like Tate & Lyle. This is a business which supplies ingredients used in everything from your breakfast cereal and pet food to mayonnaise and moisturiser. It has clients in 120 markets.
After lunch hours and coffee breaks switched from cafés and shops to kitchens and sofas, Tate & Lyle said the ensuing collapse in out-of-home consumption was initially only partially offset by sales for in-home meals, drinks and snacks during April and May.
There was some recovery as restrictions were loosened over the summer, but out-of-home revenues still remained shy of pre-pandemic levels and it posted a decline in revenues of 6 per cent across the first half. Reported pre-tax profit slipped by 4 per cent in the six months to September 30, to £157 million. The return of lockdowns has raised inevitable questions in the City around medium-term trading.
Tate & Lyle, founded as a Liverpool-based sugar refiner in 1859, sold its sugar business, including Lyle’s Golden Syrup, a decade ago. Nowadays it makes and sells the speciality ingredients that help food and drinks companies to cut the amount of sugar, calories and fat in their products. With a market value of more than £3 billion, it is a constituent of the FTSE 250.
While it warned of “considerable uncertainty” and declined to provide guidance on the second half, the business did provide some indication of its confidence by maintaining its interim dividend.
Nick Hampton, chief executive, is trying to look past the current restrictions and consider which features of the crisis are here to stay. Consumer priorities around healthy food and drink, for example, have “strengthened through Covid-19”, he said. “There’s no doubt that trend will continue as we come out of the pandemic as well.”
Advice Buy
Why Shares set for further recovery as it navigates Covid
