AVEVA Group PLC – OSIsoft’s acquisition will make combined pro forma revenue of around £1.2 billion.

FTSE 100 listed AVEVA Group PLC (LON: AVV) is a Cambridge-headquartered Engineering & Industrial Software Company, which creates industrial software that inspires people to shape a sustainable future.

Investment Rationale – Buy at GBX 3,224.00

• From a technical standpoint, 14-day RSI (43.47) is supporting the upside potential.
• As per the valuation metrics, Price/Earnings, and Price/book multiples of the AVEVA Group PLC are currently lower as compared to the corresponding multiples of the Software & IT Services industry.
• Over the past four years (H1 FY17 to H1 FY21), revenue and gross profit have increased at a CAGR of ~40.94% and ~33.83%, respectively.
• Investment in AI, Cloud and Extended Reality and digital marketing has increased to drive future growth.
• The Company continued to experience strong customer demand and order pipeline remained strong.
• Over the past four years, the debt/equity ratio has remained below 0.04x, which is significantly lower than the industry median of 0.23x.

Risk Assessments

• The potential uncertainties arising from regulatory changes, dependency on cyclical markets, global economic disruption, extended period of remote working and disruptive technologies.
• The risk of contract losses and delay in project delivery due to the challenges presented by Covid-19 pandemic.
• Any significant fluctuation in foreign exchange rates can impact the cash flows and profitability.

Recent News

25 November 2020: AVEVA expects to complete the proposed acquisition of OSIsoft between late December 2020 and February 2021. Further, it affirmed that it has cancelled the Bridge Facilities, following the right issue shares.

6 November 2020: The Company committed the right issue to raise nearly £2.835 billion in gross proceeds. It would also partly fund the acquisition of OSIsoft, LLC.

Half-yearly results for the six months ended 30 September 2020 (as on 5 November 2020)

 (Source: Company Website)

• The pipeline for H2 FY21 underpins the Board's confidence in its outlook.
• The recurring revenue as a percentage of total revenue increased from 61.9% in H1 FY20 to 64.2% in H1 FY21. The recurring grew across all four business units.
• As a result of tight cost control, the adjusted cost declined by 8.3% year-on-year.
• The interim dividend per share was maintained at 15.5 pence, which reflected business resilience.
• The proposed acquisition of OSIsoft would bolster AVEVA’s position as a global leader in industrial software.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Looking forward, the Company is well-positioned to navigate through the challenges of the existing environment, with the benefit of recurring revenue from multiyear contracts. AVEVA stayed in a robust financial position with a strong balance sheet and ongoing cash generation. FY21 is expected to be resilient despite the challenging global economic environment. The higher volume of contract renewals and robust order pipeline shall generate solid revenue growth in the H2 FY21.

Moreover, the proposed acquisition of OSIsoft remained on-track. Overall, growth is likely to be driven by strong sales execution and the ongoing trend towards digitalisation. Stock 52-week High was GBX 4,302.95 and Low of GBX 2,112.97, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on AVEVA Group PLC at the current market price of GBX 3,224.00 (as on 8 December 2020, before the market close at 12.30 PM GMT) with lower double-digit upside potential based on 49.92x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Sage Group PLC – Continued strategic execution following the strong financial performance.

Sage Group PLC (LON: SGE) is a FTSE 100-listed provider of business software and solution in North America, North Europe, Central Europe, Africa, Middle East, Asia, and Latin America.

Investment Rationale – Buy at GBX 568.20

• Looking beyond FY21, Sage expect margins to trend upwards over time, as the investment drives recurring revenue growth and operating efficiencies.
• From a technical standpoint, 14-day RSI (26.16) is supporting the upside potential.
• In terms of trading multiples, EV/Sales, Price/Earnings, and Price/Book are lower as compared to the corresponding multiples of the Technology industry.
• During the past five years (FY15 to FY20), revenue and gross profit grew at a CAGR of ~5.75% and 5.68%, respectively.
• It has sustained investment in Sage Business Cloud for long-term success.

Risk Assessments

• The Company operates in multiple geographies, and profits can be impacted negatively due to foreign exchange rate fluctuations.
• The Covid-19 led challenges can impact new customer acquisition.
• Being a Technology Company, the SGE needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the Company’s financial performance.

Financial Highlights for the year ended 30 September 2020 (as on 20 November 2020)

 (Source: Company Website)

• The cloud native solutions and planned investments for FY21 shall drive future growth.
• Sage continued the strong momentum with 8.5% growth in organic revenue, while 90% of total revenue is now recurring.
• Due to ongoing investment in the business, the organic operating margin stood at 22.10%.
• The Company also sustained solid cash generation, with underlying cash conversion of 123%.
• The balance sheet also demonstrated resilience with the liquidity of nearly £1.2 billion in cash and net debt to EBITDA ratio of 0.3x.

 One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Overall, the sustained investment in Sage Business Cloud throughout the economic cycle will form a robust base for the long-term success of the Group. Moreover, it remained committed to investing for the long term to reshape the product portfolio and reposition the Company strategically. The Company has mentioned that there is a limited impact on business through COVID-19 pandemic.

Despite the uncertain economic backdrop, Sage expects FY21 organic recurring revenue growth to be in the region of 3% to 5%, weighting towards H2 FY21. Meanwhile, the organic operating margin is expected to be up to three percentage points below FY20, which might vary depending on the level of additional investment. The stock made a 52-week low and high of GBX 515.60 and GBX 794.60, respectively.

Based on the factors discussed above, we have given a “Buy” recommendation on Sage Group PLC at the current market price of GBX 568.20 (as on 8 December 2020, before the market close at 8.25 AM GMT) with lower double-digit upside potential based 29.15 Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

Avast PLC - Continued strong organic cash flow generation helped accelerate deleveraging.

Avast PLC (LON: AVST) is a FTSE 100 quoted Company, which offers digital security and privacy products and serves over 435 million users online.

On 3 March 2021, the Company expects to release full-year results for FY21.

Investment Rationale – Buy at GBX 474.60

• From a technical standpoint, 14-day RSI (47.83) is supporting the upside potential.
• During the past three years (H1 FY17 to H1 FY20), revenue and gross profit grew at a CAGR of ~13.78% and ~21.47%, respectively.
• The experience of newly appointed Chief Privacy Officer shall promote a resilient, and transparent data protection strategy across the business, its policies, products and services.
• On 11 August 2020, the Board declared an interim dividend of 4.800 US cents per share for the six-months ended 30 June 2020, which underpins the confidence into the Company’s prospects.

Key Risks

• Despite the solid performance, the duration of the coronavirus crisis is unpredictable, and it is difficult to quantify the economic impact in the coming months.
• AVST is facing headwinds and cost pressures and is trading near a 52-week high, raising doubts at the upside potential at current prices.
• The covid-19 outbreak resulted in a lower level of trading activity which can impact the revenue stream.

Recent News

14 October 2020: Shane McNamee was appointed as Chief Privacy Officer. He would be responsible for global privacy strategy and driving the privacy-by-design strategy.

Trading Update for the period from 1 July 2020 to 30 September 2020 (as on 21 October 2020)

(Source: Company Website)

• In Q3 FY20, Adjusted Revenue surged 8.6% on an organic basis US$226.0 million, and 2.6% at actual rates.
• The user and customer trends normalised with the easing of lockdowns, and thus, Adjusted Revenue percentage growth overtook Adjusted Billings percentage growth during Q3 FY20.
• The Group continued to optimise customer engagement strategies, while Consumer Desktop business continued to perform well and was in-line with pre-pandemic levels.
• Adjusted EBITDA increased by 3.3% to US$126.0 million in Q3 FY20.
• The continued strong cash generation enabled the voluntary repayment of US$100 million debt.

Share Price Performance

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Board remained cautious of the macroeconomic risks arising from Covid-19; however, it appeared confident that health of the business and the market opportunity shall be supported by structural growth drivers. In H2 FY20, revenue growth is likely to outpace billings growth, and hence, FY 2020 outlook for Adjusted Revenue is expected to be at the upper end of mid-single digit growth and Adjusted EBITDA margin shall remain broadly flat. The stock made a 52-week low and high of GBX 263.60 and GBX 604.50, respectively.

Based on the factors discussed above, we recommend a “Buy” stance on Avast PLC at the current price of GBX 474.60 (as on 8 December 2020, before the market close at 8.55 AM GMT), with lower double-digit upside potential based 23.51 Price/NTM Earnings (approx.) on FY20E Earnings Per Share (approx.).

Softcat PLC – Both corporate and public sector segments are performing well now.

Softcat PLC (LON: SCT) is a FTSE 250 listed Company, which provides technology services and solutions in the UK and Ireland. It has a customer base of 9,500 with over 200 vendors.

On 24 March 2021, SCT expects to release its H1 FY21 results.

Investment Rationale – Buy at GBX 1,131.00

• From a technical standpoint, 14-day RSI (45.95) is supporting the upside potential.
• As per the valuation metrics, Price/Earnings, EV/Sales, and Price/Cash Flow multiples of the Secure Trust Bank PLC are currently lower as compared to the corresponding multiples of the Technology industry.
• In FY20, ROE was 59.10%, and it has remained above the industry median for the past three years.
• The Company witnessed good results from both corporate and public sector segments in Q1 FY21.
• The Company has no debt and having a consistent track record of strong cash generation.

Risk Assessment

• SCT operates in a fragmented market where it is difficult to differentiate, while Brexit is also a potential challenge for the coming year.
• Customer dissatisfaction, failure to evolve technology with changing needs, business interruption amid Covid-19, and adverse macro-economic factors can also lead to financial loss, loss of competitive advantage, reduced profit per customer, change consumer demand pattern and reduce margins.

Q1 FY21 Trading Update for the first quarter ended 31 October 2020 (as on 20 November 2020)

• The cash generation remained in line with normal trends.
• The Board noted further positive momentum in Q2 FY21.
• During Q1 FY21, the Company continued to perform well.
• It has delivered year-on-year growth in revenue, gross profit and operating profit while achieving its recruitment target.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion 

During FY20, SCT delivered a strong financial and operational performance with year-on-year growth of 8.6% in revenues, 11.6% in gross profit, and 10.9% in operating profit. Meanwhile, the customer base also increased by 3% year-on-year. It also had a strong balance sheet with net cash of GBP 80.1 million and debt-free position. During the last four months of FY20, the Company experienced a softening in demand from corporate customers; however, public sector business performed strongly. In FY20, Net Promoter Score jumped from 60 to 66, and it is focusing on both new and existing customers. In a nutshell, the Company has continued the strong momentum and expects to report even stronger H1 FY21 results. Stock 52 week High and Low were GBX 1,454.32 and GBX 826.67, respectively.

Based on the factors discussed above, we recommend a “Buy” stance on Softcat PLC at the current price of GBX 1,131.00 (as on 8 December 2020, before the market close at 9:50 AM GMT), with lower double-digit upside potential based 35.82 Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

 

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

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

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