Since reporting its full-year results, Bravura Solutions’ (ASX:BVS) share price has trended down from around $4.30 per share. We recently reviewed the fundamentals in order to assess whether BVS presents an attractive opportunity.
About Bravura Solutions
Bravura Solutions provides highly functional core registry offerings. It is led by Sonata and is supported by an ecosystem of microservices solutions.
The key factors underpinning the Company’s growth profile is clients’ need to address speed to market for new products, the growing importance of a seamless digital experience, ongoing changes in financial services regulation, and pressure to increase operational efficiency.
The Company has two operating segments: Wealth Management (which accounts for around 2/3rd of group revenue and ~55% of earnings) and Funds Administration (which services Fund Managers and 3rd party administrators).
The Company’s flagship software product is Sonata. It is an integrated platform that supports Pensions, Superannuation, Life Insurance, and Wrap and Investment products. Sonata also enables the Company’s clients to unify a number of disparate, siloed IT systems and provides a single-client view of customer information that facilitates consolidated reporting. It is estimated that (~75-80%) of revenue from the Wealth Management segment is derived from Sonata.
Key Fundamental Drivers
Sonata Contract Wins Resume After a Hiatus
Sonata’s key value proposition is that it assists clients to reduce the costs associated with maintaining multiple software systems. It also enhances their customer experience through more streamlined digital engagement. New contract wins by Sonata are considered valuable from the viewpoint that they increase the portion of recurring revenue.
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The frequency and scale of contract wins by Sonata has historically been a key factor driving sentiment towards the stock. At the time of BVS’ listing in November 2016, Sonata had 17 wealth management clients. Since that time, Sonata, on average, has typically secured two clients each half, with no subsequent client losses.
In late October 2020, the Company announced that Sonata had secured a 7-year contract with Aware Super. Previously, Sonata had not secured a new contract since 1H19 and the last major long-term contract secured was Legal & General Investment Management (LGIM) in 2H18, which also has a 7-year term.
Portion of Recurring Revenue Increasing
The Company generates revenue from three sources: Recurring revenue, Project Fees and Licence Fees. Recurring revenue comprises maintenance, managed services, SaaS and in-production professional services from ongoing client demand. Project fees comprise professional services from initial implementation and development requirements. Licence fees are earned on a one-off or recurring basis.
In FY20, recurring revenue accounted for 77% of total revenue. Recurring revenue grew by 7% in FY20 as new clients were added and existing clients broaden their use of functionality, supported by the long-term nature of Bravura’s client contracts. The significance of having a high portion of recurring revenue is that new contract wins also attract implementation fees over the initial 2-3-year period. This is because clients deeply embed Bravura’s solutions into their business’ core operating model.
In context, many of BVS’ ASX-listed peers have a higher portion of recurring revenue, as they largely Software as a Service (SaaS) businesses. As such, BVS is more exposed to cyclical revenues than its ASX-listed peers.
Margins Have Potential to Recover
In FY20, revenue for the Wealth Management segment increased by 2.0%, while EBITDA declined by 1.8%. The resultant decline in EBITDA margin (from 30.5% in FY19 to 29.3% in FY20) reflected lower licence fees. In contrast, the Funds Administration segment performed better. It reported a 16.0% increase in revenue and 32.8% increase in EBITDA. This is because the segment benefitted from higher licence fees and increased implementation and project work arising across its client base (which is typically higher-margin work). The strong margin expansion for the Funds Administration segment led to group margins improving.
In its outlook commentary for FY21, BVS noted that “While the new sales pipeline remains strong, due to the wider impact of COVID-19 there is greater uncertainty in the timing of deal closures when compared to prior years. It is therefore possible that FY21 NPAT will be similar to FY20”.
Whilst this commentary indicates margin pressure in FY21, the potential for EBITDA margin to recover from FY22 is underpinned by: i) The likelihood of further contract extensions, given the high portion of recurring revenue, ii) A shift in mix towards higher-margin post implementation work and iii) Earnings accretion from the Delta acquisition, which is forecast to achieve revenue growth in the range of 20-30% with margins similar to BVS’ Wealth Management segment.
Balance Sheet Provides Scope For Further Acquisitions
The Company retains a healthy cash balance, with a cash balance of $99.1m and no debt as at 30 June 2020. The strong balance sheet position allows BVS to pursue acquisitions as well as fund R&D expenditure. It is also worth noting that Sonata’s track record with an established client base and continued product development would be key selling points to any potential targets.
The Company has invested significantly in developing Sonata and is expected to double its capitalised Research & Development (R&D) expenditure in FY21 and FY22, relative to FY20. An increasing portion of new functionality is funded by individual clients, which can then be rolled out to BVS’ other clients, as well as for newly-acquired businesses.
The Company indicated at the FY20 results release that there was evaluating “a pipeline of additional acquisitive and organic growth opportunities”. These opportunities are likely to come from the Superannuation, Wrap and Funds Administration sectors in Australia, as well as in the UK.
Despite Company guidance for flat earnings growth in FY21, earnings growth in FY22 is expected to be around 10%. The key factors supporting this level of growth include: i) A strong pipeline of opportunities, ii) Increasing investment in technology, iii) The potential for further earnings-accretive acquisitions, iv) The Company’s ability to leverage its technology for newly-acquired businesses and v) New contract win for Sonata with Aware Super.
Accordingly, with the shares now trading on a less demanding 1-year forward P/E multiple of ~19x, we consider BVS may well present an attractive opportunity.
In the last few weeks, have seen BVS marginally head lower than the March low before bouncing strongly again. On the weekly chart, it has provided us with a nice reversal known as a morning star formation (circled). We now expect the share price to recover from here. In the short-term there may be some resistance near $3.75.
Michael Gable is managing director of Fairmont Equities.
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