AVEVA Group PLC (LON: AVV): Significant investments in Cloud, Artificial Intelligence, and Extended Reality.

AVEVA Group is an FTSE 100 listed engineering and software company, which provides industrial software to shape a sustainable future. AVV helps companies from several industries like food and infrastructure to energy and water to find opportunities in disruption and deliver solutions towards the direction of achieving sustainable growth. The Company connects people through a common cloud platform, AVEVA Connect.

AVV will provide a trading update on 27 April 2021.

(Source: Company Presentation)

Technological Initiatives

The Company is on the verge of completing the acquisition of OSIsoft, LLC. This deal would achieve various revenue and cost synergies and bring together two leading companies in engineering and industrial software. OSIsoft is the leading provider of real-time industrial data software. Moreover, the combined entity would drive the progress of the next generation of engineering and industrial digital transformation.

Furthermore, the Company is making significant investments to accelerate growth trajectory with Research & Development investments in Artificial Intelligence (AI), Cloud and Extended reality. Cloud provides a large set of analytical data required to make better decisions. AVEVA Connect is the cloud-based software platform. AVEVA AI assists customers to enhance their process, solving problems and making risk-based decisions, which may result in raising competitiveness and significant cost savings. The recent partnership with Axonify would provide adaptive learning powered by AI within AVEVA unified learning framework.

AVV had incurred around £60.3 million in Research & Development Cost during H1 FY21. Cloud remained a key strategic objective for AVV, and Cloud business unit had accelerated its progress with the launch of nine new products during H1 FY21.

(Source: Company Report)

Growth Prospects and Risk Assessment

AVV had anticipated FY21 to remain resilient despite the challenging global economic environment. The higher volume of contract renewals and robust order pipeline shall generate substantial revenue growth in the H2 FY21 period. Moreover, the proposed acquisition of OSIsoft remained on-track.

(Source: Company Presentation)

AVV had demonstrated the conversion of two significant contracts in the Marine sector from annual fees to multi-year subscription, delivering client’s growth during these challenging times. The Company would continue to grab significant opportunities towards digitalisation of the industrial world.

However, the performance can be significantly impacted by principal risk of talent acquisition and retention, cloud strategy and SaaS security, Digital transformation agenda, sustainability, regulatory compliance, dependency on cyclical markets, disruptive technologies. The Group is also exposed to Covid-19 related risks, which may cause a delay in product development and increase the risk of contract losses.

Industry Outlook Dynamics

A per the recent report from the Industry Arc, the enterprise software market is anticipated to grow at a CAGR of 6.15% and reach USD 545 million by 2025. The growth is largely driven by increased usage of cloud-based services in small and medium organizations. Moreover, several companies are opting for integrating cloud-based technology to lower the upfront cost and increase the accessibility of business applications. Overall, an enterprise software increases the efficiency and productivity of an organisation.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of AVEVA Group Plc.

Recent Developments

On 28 January 2021: The Company had provided the following update regarding the progress in OSIsofta acquiring business. This acquisition had received all clearances in antitrust and regulatory, except the approval of the CFIUS (Committee on Foreign Investment in the United States). The parties (that involve in the acquisition) will enter into a new period of up to 45 days, which allow more time for discussion and review with CFIUS.

On 28 January 2021: AVV announced that David Ward, as a Company Secretary and Finance Director of AVEVA, is stepping down from the Board and current position.

A Glimpse of Business Segments (H1 FY21)

Trading Update (for the nine months ended 31 December 2020, as on 15 January 2021)

• In the three months to December 2020, the Company had a strong quarter of contract renewals, with an increase of more than 26% in revenue.
• In 9M FY21, the revenue increased by around 1.5% (on an organic constant currency basis), with an increase of 10% in recurring revenue.
• The growth was driven by a significant number of scheduled subscription renewals, which also includes a large three-year contract renewal in the Food sector.
• AVV has converted its two large contracts from annual fees to multi-year subscription in the Marine sector.
• For the remainder of the financial year 2021, the order pipeline was solid, supported by several large contract renewals and efficient digital demand generation.
• In January 2021, the Company made the largest digital event.
• On 31 December 2020, the Company has cash of £2.7 billion, with no debt.
• In the financial year to 31 December 2020, OSIsoft (acquiring Company) achieved billings growth of 8.5% and continued to perform well, with strong growth in the Chemicals & Petrochemicals, Pharmaceuticals & Life Sciences and Power Generation & Distribution markets.
• The Board also remains confident in the outlook for the 2021 full year, with strong digitalisation in the industrial world and significant growth opportunities ahead.

Financial and Operational Highlights (for the six months ended 30 September 2020 (H1 FY21), as on 5 November 2020)

(Source: Company Website)

• First-half results were broadly in-line with the Company’s plan for the shape of the year, and recurring revenue surged by 230bps year-on-year. Recurring revenue grew across all four business units.
• Led by tight cost control, the Company has shown a reduction in adjusted costs of 8.3%
• The Company’s main focus is on the strategic investments, which drive future growth with R&D investment in AI, Cloud and Extended Reality. It also increased its investment in digital marketing.
• In H1 FY21, the net cash and treasury deposits increased to £59.9 million (H1 FY20: £58.6 million), with strong collections from customers.
• Aveva has maintained an interim dividend per share of 15.5 pence.
• For FY21, the Company is expected to be resilient, with strong order pipeline and higher volume of contract renewals.
• It also expects solid revenue growth in the second half of 2021.
• Further, AVEVA's position will be strengthened by the proposed acquisition of OSIsoft.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

On 19 February 2021, at the time of writing (before the market close, at 9:05 AM GMT), AVEVA Group PLC shares were trading at GBX 3,790.00, down by 0.68% against the previous day closing price. Stock 52-week High was GBX 4,302.95, and Low was GBX 2,112.97, respectively.

From the technical standpoint, 20-day SMA (3,760.60) and 20-day EMA (3,752.44) support the upside potential.

In the last six months, AVEVA Group PLC’s stock price has delivered a return of ~12.30% return as compared to ~9.47% return of FTSE 100 Index and a ~0.22% return of FTSE All-Share Technology index, which shows that the stock has outperformed the benchmark sector and the benchmark index.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

AVEVA Group had made significant progress regarding the acquisition of OSIsoft as it had received the antitrust and regulatory clearances and waiting for CFIUS (Committee on Foreign Investments in the United States) approval. AVV had demonstrated several large contract renewals and efficient digital demand generation, with revenue growth and strong order pipeline. The Board remained optimistic regarding the FY21 outlook, with a substantial scope of digital penetration in the industrial world and significant growth opportunities ahead. AVEVA stayed in a robust financial position with a strong balance sheet and ongoing cash generation. Overall, growth is likely to be driven by strong sales execution and the ongoing trend towards digitalisation. Looking forward, the Company is well-positioned to tackle existing business challenges, with the benefit of recurring revenue from multiyear contracts.

Considering a strong quarter of contract renewals, improved revenue growth in 9M FY21, solid order pipeline, strengthened by the proposed acquisition of OSIsoft, strong momentum on strategic priorities, sound business model, decent operating and financial performance, robust cash generation capabilities, consistent dividend payments from the last five years, and support from the valuation as done using the above method, we have given a “BUY” recommendation on AVEVA Group at the current price of GBX 3,790.00 (as on 19 February 2021, before the market close at 9:05 AM GMT), with lower-double digit upside potential based on 53.13x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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