AVV.L Share News (AVV)

LONDON (Alliance News) - Aveva Group PLC Monday reiterated its full-year expectations, despite seeing a "disappointing" first half performance, as it saw pretax profit fall in the half year to end September on lower revenue.

The engineering data and design IT system provider upped its interim dividend to 5.5 pence per share from 5.0 pence a year before.

Aveva had previously lowered its expectations for its first half in September, leading its shares to fall, citing the strength of sterling and the timing of key engineering, procurement and construction rental renewals. At that time, it guided a heavier second-half weighting than it had seen in previous years as its revamped selling strategy begins to come through.

Aveva on Monday posted an interim pretax profit of GBP14.2 million, down from GBP27.3 million a year before, as revenue fell 21% to GBP85.9 million from GBP108.5 million. The company said its rental licence fee revenue had been reduced by around GBP13 million due to the phasing of key rental contracts, rental contracts not being renewed in Brazil, and lower levels of activity in the Asia Pacific region.

Additionally, initial licence fees dropped 27% due to weakness in Asia Pacific and the Americas offsetting growth in China, India and parts of Europe, and Services revenue fell 9%.

In Brazil, Aveva said it has been hampered by state-owned oil company Petrobras not awarding new projects to engineering contractors that are Aveva's customers. Petrobras on Monday was reported by the Financial Times to be facing an investigation by the US Department of Justice, adding to corruption allegations against the company in Brazil.

Aveva also was hit by the strength of sterling against the dollar, euro, Brazilian real, Norwegian kroner and yen. On a constant currency basis revenue fell just 15%.

The company said it was continuing to monitor the situation in Russia carefully in regards to sanctions and how they might impact its business.

Aveva said that despite the disappointing performance, the "underlying fundamentals of the business have not changed, and there has been no change to the business model." It is maintaining a "tight" control on operating costs.

Total costs fell to GBP64.5 million from GBP68.9 million, as the company moved projects in house, reduced bonuses for its research and development staff, and rationalised staff, although this was partly offset by investment in headcount and marketing, as well as in the company's information systems.

Aveva had originally planned to increase its headcount in the second half of the year, but said that in light of its performance in the first half and lower activity, this has been limited to sales and marketing. It expects operating expenses to be around GBP10 million lower than originally planned in the second half due to lower sales commissions, bonuses, and the reduction of other non-payroll costs.

"Despite the macro-economic environment, there are a number of steps we are pro-actively taking to ensure that we remain focused on long-term growth in revenue and profitability," said Chief Executive Richard Longdon in a statement.

Numis reiterated its Buy rating for Aveva, noting that whilst it clearly faced challenges it some end markets such as Brazil and Korea, there "are also areas of strength, and new product development and uptake is encouraging."

Specifically, Numis highlighted the long term opportunity from launching full-capability 3D design as a cloud proposition as a "game changer" which could "dramatically increase the addressable market" in the longer term.

Liberum, which has a Hold rating on the stock, is less optimistic, saying it does not expect a near-term rebound in Aveva's key end market of oil and gas capital expenditure. Liberum says the lack of a share buyback may disappoint some, and "suggests limited confidence in the near-term outlook" as at a recent capital markets day Aveva's chairman had hinted at a possible buyback.

Investec also has a Hold rating, saying it is too early to turn positive on the company, although results were in line with reduced expectations, as it still sees a degree of uncertainty over Aveva's full-year out-turn.

"Aveva is a quality business, but we continue to see it as too early to turn positive," Investec analyst Julian Yates said. "There is limited visibility for next year?s profit trajectory at this stage and although the business has substantial value, we need to gain more clarity over the medium-term forecast prospects and cost plans before turning positive at current valuation levels, which are not cheap."

Shares in Aveva are trading up 6.1% at 1,480.00 pence Monday morning.

By Hana Stewart-Smith; hanassmith@alliancenews.com; @HanaSSAllNews

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