ii view: AVEVA shares up again amid Covid-19 cost cuts

The digitalisation of industry is fuelling growth at this software maker, but Covid is a threat. 

Full-year results to 31 March 2020

• Revenue up 8.8% to £834 million
• Adjusted profit up 23% to £217 million
• No debt and cash and deposits of £114.6 million
• Final dividend unchanged at 29p per share

Chief executive Craig Hayman said:

"I am very pleased with AVEVA's performance over the last year. The group has grown as we play a leading role in the digitalisation of the industrial world, which is being driven by a need for sustainability, the industrial internet of things, Cloud, data visualisation and artificial intelligence. At the same time, we continued to drive operational improvement in the business, which is increasing recurring revenue and margins.

"Looking forward, AVEVA is well placed to navigate through the challenges of the current environment, with the benefit of recurring revenue from multi-year contracts. AVEVA is in a strong position and our strategy and medium-term objectives remain unchanged."

ii round-up:

Industrial software maker AVEVA Group (LSE:AVV) today posted results which matched City forecasts, along with announcing £50-£60 million of targeted cost savings given the impact of Covid-19 on its customers. 

Its biggest end market is oil & gas, generating around two-fifths of sales. Customers include BP (LSE:BP.), Abu Dhabi National Oil Company, Hyundai Heavy Industries, Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) and semi-conductor company Micron Technology (NASDAQ:MU).

AVEVA shares rose by more than 3% in early UK trading having fallen by 10% year-to-date. Shares for accountancy software maker Sage Group (LSE:SGE), which is also moving from a licence fee to subscription fee model, are down by just under 8% in 2020. 

Recurring revenue increased as a proportion of total revenue to 62.2% from 53.8% the year before. Growth across all geographic regions was enjoyed with Asia Pacific showing particular strength.

AVEVA's software helps drive efficiency gains for the industries it serves such as energy, mining and food production. Management has been accelerating and investing in cloud development and delivery, increasing customer flexibility in how they consume its software. 

Targeted cost savings to help counter expected pandemic disruption to its customers are expected to come from reductions in discretionary spending, travel costs and the switching of key events from physical to virtual. Over 90% of its employees are now working remotely. No staff reductions or furloughing are currently planned. 

ii view:

AVEVA operates across the four areas of engineering, monitoring & control, asset performance management and planning & operations. Engineering consists of design and simulation software and generates just over 40% of sales, with monitoring & control around 30%, asset performance around 15% and planning & ops the balance. 

Its largest customer segment is oil & gas at around 40% of sales. A previous merger of Schneider Electric’s industrial software business with AVEVA helped add industry diversity. Packaged Goods such as food & beverage and pharma, power, marine, chemicals & petrochemicals, and metals & mining now each account for 5% to 10% of group revenue. Growth in markets such as infrastructure is also being pursued. 

For investors, the digitalisation of the industrial world offers continued growth prospects. AVEVA’s broad portfolio of software solutions span the entire operational life cycle of many of the world’s major industries. A move away from licence fees to subscription fees should also enhance predictability, helping to underwrite shareholder returns such as its ongoing dividend payment. 

However, Covid-19 does increase future uncertainty, and there is disruption to many industries including oil & gas and mining is being caused. For now, while long-term prospects remain enticing, some near-term caution appears sensible. 

Positives: 

• Diversity of customers and geographical locations
• A strategy to grow in new markets such as infrastructure

Negatives:

• Facing Covid-19 uncertainty
• Forward Price Earnings valuation above the 10-year average

The average rating of stock market analysts:

Strong hold