Investment View: Despite the silly moniker, Aveva is a name to follow

Aveva OUR VIEW: Buy. SHARE PRICE: 1,638p (+157p)

Phoenix IT OUR VIEW: hold for now. SHARE PRICE: 183.75p (-12.4p)

IT companies are addicted to two things: jargon and silly names.

Aveva is a case in point. It is easy to confuse it with two quite different companies with equally daft monikers, both of which are better known.

For the record, Aviva is a struggling life insurance company. Arriva operates buses.

Aveva, by contrast, is a degree ahead of both of them in terms of performance. Management really ought to change the name to AVEEEEEVA. Just to avoid getting tarred with the same brush as the other two.

Aveva is an engineering software company that operates in a variety of sectors, most notably the oil, gas and power generation industries.

It seems to be the way of things that, when it comes to IT, the Americans do the gigantic consumer brands with world domination on their minds (Facebook, Google, etc etc) while the Brits do relatively unglamorous, medium-sized niche operations – which nonetheless do really rather well.

Operating in the oil/gas/power markets markets puts Aveva right in the middle of a sweet spot.

And not just because energy prices are high. Demand is growing, and will continue to grow over the medium to long term, even if the global economy stutters a bit more in the short term. What is more, oil production increasingly involves deeper fields that are harder (and more expensive) to access, requiring a great deal of skills, expertise and expensive product – skills and expertise and expensive product that Aveva has lots of.

It has other, cyclical businesses (such as marine) which have been more subdued, but yesterday's results showed this company is in fine fettle: revenue is up 13 per cent to £196m, adjusted pre-tax profits up 14 per cent at £62.3m, final dividend up 14 per cent at 17p for the year ending 31 March.

One issue that raised eyebrows was a 9 per cent fall in the sale of software licences. There are two reasons for this. The first is that Chinese customers prefer to pay upfront rather than rent and the Chinese business has undergone some pain, which knocked first-half revenues a bit. Things should improve following a restructuring.

The other reason is that customers elsewhere prefer to rent. This means they can get their hands on Aveva's product without having to seek approval for capital expenditure. Renting makes more money for Aveva after two and a half years. But the average project it gets involved with lasts for three, so this should work in its favour.

It might be a bit harsh, but the dividend could be considered disappointing – after all, Aveva has nearly £180m of net cash on its balance sheet. But most IT companies don't pay anything at all. And Aveva argues that it has a pipeline of deals which, when they are integrated, will offer shareholders even more. This might be one company worth giving the benefit of the doubt to on that front.

The only downside in the investment case is the shares' valuation. They trade on a fancy multiple of more than 20 times next year's forecast earnings, while yielding just 1.6 per cent. Fancy, but arguably deserved. We were holders at 1,581p last year and the shares had been below that before yesterday's leap. They are pricey, but the world's thirst for energy is not going to be slaked anytime soon. The shares might actually be relatively competitively valued. Buy

Pheonix IT is a British tech company with a far less happy story to tell. It oversees and manages IT for other organisations, handles business continuity, provides consultancy and other services.

The company's results were actually in line with, maybe even slightly better than, what had been fairly low expectations. Underlying profit fell to £28.7m for the year to 31 March, down from £32m, on revenues of £264.6m against £271.6m. But there were a number of red flags. One of them was the firm's mid-market division, where revenues dipped by 7.3 per cent to £91.1m and underlying profits fell 9.4 per cent to £7.5m. Another was the increase in the company's debt to nearly £70m, while the dividend of 10.9p was a shade below forecasts of 11p.

The finance director is on his way out and the future of the business depends on a restructuring plan put in place by its new chief executive, David Courtley. He wasn't exactly brimming with optimism in the results statement, in which the company bemoaned "challenging" conditions.

Phoenix is beginning to worry people, as was made clear from the sharp fall in the shares yesterday.

It's cheap, offering a prospective yield of 6 per cent while trading on just 6.5 times next year's earnings, and the shares are actually above the 163p level at which we said hold after the interim results.

So I'd be inclined to keep holding, for the moment. But any more negative news from the company would be a signal to sell.

Independent Comment
blog comments powered by Disqus
Career Services

Day In a Page

The 50 Best beachwear

The 50 Best beachwear

The hottest summer gear for men and women
Still standing: George Galloway reveals why his staunchly Leftist outlook is still invariably right

Still standing: George Galloway

Written off, ridiculed, wrongly accused of taking bribes the honourable member for Bradford West, has never bowed to the critics.
How will Daniel Radcliffe's fans react to his latest turn - as a damaged, drug-taking Beatnik poet?

Daniel Radcliffe as drug-taking Beatnik poet

His decade as the boy wizard may be over, but that hasn't hexed Daniel Radcliffe's enchanted life.
For whom the bell tolls: £20m 'Memo' project takes shape on Dorset's Jurassic coast

'Memo' project takes shape on Dorset coast

It started as a stonemason's visionary idea – to commemorate all the species that have ever existed and are now extinct.
Just add sunshine: Bill Granger's Turkish delights

Just add sunshine: Bill Granger's Turkish delights

Turkish cuisine is perfect for those long, sociable weekend meals with friends. It's just a shame that money can't buy the key ingredient.
Objets czar: David Usborne’s collection of myriad objects is quite the mystery

Objets czar: David Usborne’s collection of myriad objects

To others, they're junk. To David Usborne, they are his life: useful gizmos, mysterious thingamajigs and anonymous articles that dominate his home.
The iron ore lady: Why the world's richest woman is mired in controversy

World's richest woman: Gina Rinehart

Family feuds, attempts to control the Australian media and bitter public disputes are keeping the mining magnate in the headlines.
We just click: How Lego keeps building on its success

How Lego keeps building on its success

This year, Lego announced record profits. Gerard Gilbert visits its Denmark HQ.
The other bits: Mark Hix creates delicious and economical meals with cheaper cuts of meat

Mark Hix cooks with cheaper cuts of meat

Our chef creates delicious and economical meals on a budget
Strokes of genius: How to create summer's bold make-up look

Strokes of genius: Summer's bold make-up

From coral lips to fly-away fringes, make-up artist Kim Brown and hair stylist Richard Scorer reveal how to create the look
Marking his territory: Kilian Hennessy creates fragrances designed to provoke the senses

Marking his territory: Kilian Hennessy

The perfumer creates fragrances designed to provoke the senses
Photo essay: Britain's 1948 Olympians today

Britain's 1948 Olympians today

Photo essay
The top five E3 2012 triumphs: From Ubisoft's suite of titles to Dishonored and The Last of Us

The top five E3 2012 triumphs

The games and moments that left us grinning like the Cheshire Cat
The green movement at 50: Can the world be saved?

Can the world be saved?

Population growth and climate change are the big problems facing the earth in the next 50 years. But are there any solutions?
France: Will xenophobia go mainstream?

France: Will xenophobia go mainstream?

In the beautiful Rhone delta, John Lichfield visits a village where a dangerous new political landscape is taking shape