Newcomer Aveva builds FTSE 100 momentum

FTSE 100 newcomer Aveva continues to impress after more strong trading by the industrial software group.

Life in the FTSE 100 index doesn't appear to have fazed Aveva after the fast-growing industrial software company fuelled City hopes today for further share price milestones.

The Cambridge-based group hasn't looked back since last year's transformative tie-up with part of France's Schneider Electric increased the company's presence in the key North American market and reduced dependency on the cyclical oil and gas sector.

Shares have trebled over the past three years, resulting in May's promotion to the FTSE 100 for the first time at the expense of Marks & Spencer (LSE:MKS). The stock subsequently peaked at 4,170p in July and is close to this level again today after an encouraging second quarter trading update.

Aveva revealed that the momentum of last year had continued after building on an already strong Q1 to achieve low double-digit revenues growth for the half year. The performance has been broad based, with Asia Pacific showing particular strength.

Analysts at Investec Securities said the update materially de-risked the full-year and was likely to shift the City's consensus profits forecast by a mid-single digit percentage. Aveva's interim results on November 12 will provide full details about the current performance.

In the meantime Investec is sticking by its 4,600p price target: "Aveva remains our core large cap sector pick and we see continued forecast momentum ahead supporting the rating." This view is shared by counterparts at Numis Securities with a target of 4,375p.

Aveva trades on a one-year forward price/earnings multiple of 31x, but Panmure Gordon's Peter McNally thinks this fails to capture the impact of future margin improvement.

He estimates that the adjusted earnings margin could rise from 23% in the 2019 financial year to between 40% and 45% over the long-term. This compares with the company's own medium term goal of 30%, which it disclosed in September last year.

Aveva is benefiting from serving industries at the early stages of their digitalisation growth curve, with external estimates suggesting that the current addressable market for its products of approximately £15 billion was likely to grow significantly.

The increasing use of technology reflects the need to reduce both capital and operating costs, with the industrial internet of things, data visualisation and artificial intelligence among potential solutions.

By combining with Schneider, the specialist in engineering design and 3D visualisation now has a much broader revenues mix through Schneider's specialisms in food, beverages and pharmaceuticals. Schneider took a 60% stake in Aveva through the tie-up.

In its first set of results as a combined company in May, Aveva lifted its full-year dividend by 7.4% to 29p a share.

The company dates back to 1967 as a breakaway from Cambridge University, when it was known as CADCentre. It listed on the London Stock Exchange in 1996 and changed its name to Aveva in 2001.