Long way back for Aveva

A surprise profits warning has wiped out a fifth of Aveva's market value, sending shares in the highly-rated engineering design software company to their lowest level in over two years. It had already flagged up a currency hit and timing of rental renewals in July, but now we hear that demand in South America and parts of Asia is on the wane.

That's a big problem for Aveva, not just operationally, but in terms of valuation. Its shares have typically traded well above 20 times forward earnings - a big premium to peers - which has always been a problem for many investors. But if you do decide to pay that kind of multiple, you expect reliable long-term growth.

To be fair, that's just what Aveva had provided – earnings per share (EPS) grew at compound annual growth rate (CAGR) of 15% between 2007 and 2013. That's why this latest announcement has been punished so harshly.

Aveva now expects first-half sales of between £84 million and £90 million. That's £20 million less than consensus estimates and well down on last year's £108 million. It puts the cost of currencies and rental renewal timing at £14 million. The rest is blamed on a restructuring of the sales force and mixed trading.

No wonder Numis Securities has almost halved forecasts for half-year pre-tax profit to £13.3 million. It does, however, predict a pick-up during the final six months, so cuts full-year estimates by a more modest 13% to £67.8 million, giving EPS of 77.9p.

At 1,696p, Aveva shares still trade on almost 22 times prospective earnings, dropping to 19 for the year to March 2016. Strip out forecast year-end net cash of £153 million, or 239p per share, and it’s a more digestible 18 times. Even so, the prospect of this being more than just a one-off should be a concern.

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