Today's dramatic share price crunch at AVEVA (AVV) is a classic case of rating reshuffling. Shares in the computer-aided design software group plunged more than 10% in early trading, to £23.17, on scaled back growth at its Enterprise Solutions (ES) division. Half-year revenues here managed just 5% growth, a far cry from the 31% advance last year and 16% divisional growth in the first half of 2012.
That's seen as a big enough blow to get investors heading for the exit in a meaningful way, even if the share price decline has eased off, now trading down 8.5% down at £23.49.
Nevermind, it seems, that ES counts for just 12% of group revenues, which are up overall an impressive 11% to £108.5 million, thanks to another robust performance from its by far biggest unit (88% of total), Engineering and Design Systems (EDS).
Recurring revenues grew 13% in the half to represent 70% of the total. Nevermind that double-digit expansion in sales is being managed successfully so that costs are not creeping significantly higher – sales and distribution expenses rose just 9.2% in the period.
The key problems at ES are not of AVEVA's own making. According to our contacts, financial troubles at a shipyard operator ended one project, and another oil customer is believed to have switched from enterprise-wide deployment to a much slower project-by-project rollout. Unfortunately, this is the result of the seat-of-the-pants world of project-by-project information systems sales, and AVEVA is not alone. Similar trends have knocked a hole in revenues at smaller peer IDOX (IDOX:AIM).
The market's heavy-handed response comes into context when you consider that AVEVA's shares had been trading on a current year to end March 2014 price/earnings (PE) multiple of 30.5. That sort of rating leaves precious little room for error, be it self-inflicted or otherwise.
Yet AVEVA has long justified a premium rating to the UK software sector's 21-odd thanks to its largely impressive execution, strong cashflows and growing recurring revenues. Operating cashflow in these figures is up 32% to £30.2 million and there's £95.8 million of currency on the books. Strip that out and this year's PE falls to 25.6, and to 22-times next year's 97.9p earnings per share (EPS), Numis' unchanged estimate.
Shares selected the stock as one of our 'Perfect Picks' in a cover feature in April 2012, at £16.48, and buyers then will today be sitting on 43% paper profits. Timing is important in investment, no question.