As more and more nuclear power stations, ships and petrochemical plants are built in the developing economies of Asia, this company – which develops the Computer Aided Design Software used by engineers – has seen revenues jump. But with economic growth set to moderate, it’s beginning to look overvalued:
Aveva (AVV), tipped as a BUY by Panmure Gordon
Aveva is a leading developer of Computer Aided Design (CAD) software for the oil and gas, power and marine industries. The software helps engineers, increasingly based in Asia, to design and build complex structures, such as offshore oil platforms, petrochemical plants, nuclear power stations and ships. These end markets are booming, driven by record demand for power and a general rise in infrastructure spending from emerging economies such as India and China. As a result, revenues leapt 44% to £94.9m for the year to March 2007, delivering adjusted earnings per share of 31.7p. But with the shares having nearly trebled in value over the past 12 months, I think the stock is currently overvalued.
With global economic growth set to moderate, the recent near-perfect conditions in Aveva’s target markets have passed – and it will prove much harder to repeat such feats in the future. Most of its income is derived from large-scale capital projects, which will become more expensive to fund, given the wobbles in the credit markets. In fact, at Aveva’s first-quarter trading update on 12 July, the group said it had made “solid progress” so far this year – a stark contrast with the “unprecedented demand” seen last September. Aveva also competes with industry giants, such as Dassault Systems and Intergraph, which are much larger and better funded, and will surely respond aggressively if they lose market share. On top of this, around 35% of the group’s sales are denominated in dollar-related currencies – so as the greenback continues to fall against sterling, this will act as a natural brake on profits.
Finally, we come down to pure valuation. City forecasts are for sales and earnings per share are to be £110m and 34.5p this year, increasing to £123m and 39.3p for the period ending March 2009. Assuming these somewhat-stretched targets are achieved, then the stock trades on toppy p/e multiples of 26.5 and 23.3. Yes, Aveva is a quality business, with strong recurring revenues (56%) and a £41m cash pile. But given the uncertainty over the economy, I would instead rate the shares on 17 times 2007 earnings – giving a fair value of around 600p, or 35% less than today.
That makes Aveva look vulnerable at more than £9 per share and I believe there is substantially more downside risk than upside potential for investors. Hence prudent shareholders should take profits. Indeed, just last December both the CEO and finance director sold, in total, over £5m worth of stock at 720p.
Recommendation: TAKE PROFITS at £9.29
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments