In the less than 2 years Bravura Solutions (ASX:BVS) shares quadrupled in value. BVS has been sold off with the rest of the market. However, does this make it a buy, or could we see the selling continue?
About Bravura Solutions
Bravura Solutions is a market leading global provider of enterprise software and software-as-a-service (SaaS) to the Wealth Management and Funds Administration industries. The Company’s flagship software product is Sonata. This is an integrated platform that supports Pensions, Superannuation, Life Insurance, and Wrap and Investment products. It 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.
As such, 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. BVS has two operating segments: Wealth Management and Funds Administration.
Impressive History of Revenue Growth For Sonata
Sonata derives the majority of revenue for the Wealth Management segment (~80%). It remains the key driver of growth for the Company. Sonata’s revenue base has growth impressively, from $5.0m in FY13 (from three clients) to $122.5m in FY18 (from 24 clients). Over this period, the average revenue per client has grown from $1.7m to $5.1m. Further, BVS has achieved client wins in all key markets, comprising the UK, Australia, NZ, and South Africa. There is also a strong pipeline of opportunities coupled with increased operating leverage.
Contract Wins For Sonata Are Critical
BVS relisted with 17 Wealth management clients and since re-listing in November 2016, Sonata, on average, has secured two clients each half, with no subsequent client losses. Further, the average contract length is believed to be between five to 10 years. These factors support a high level of recurring revenue for the group (~67% in FY18). This has progressively increased as new clients are added and existing clients broaden their use of functionality.
Whilst the Company has had previous success in securing new contract, it is worth noting that:
i. BVS does not disclose specific financials in relation to contract wins – such as the contract term, pricing, overall value. This is on the basis that such information is commercially sensitive.
ii. There is no real feel as to what portion of uncontracted professional service work is included within each contract. This work includes both maintenance services (which are delivered over the life of the contract) as well as implementation (which are typically weighted to the first 2-3 years of a long-term contract). These service-based fees accounted for ~23% of group revenue in FY18 and further underpin the predictability of BVS’ earnings profile, as they are classified as higher-margin recurring revenues.
Balance Sheet Supports R&D Expenditure + Acquisition Opportunities
The Company has a strong net cash balance, which allows BVS to continue undertaking research & development (R&D) expenditure on Sonata. In FY18, R&D on Sonata increased, but as a % of Sonata revenue, declined to 24% compared to 26% in FY17. This indicates that the additional R&D investment in Sonata is resulting in positive operating leverage. This improvement is a function of a greater portion of Sonata R&D being funded by clients (71% of Sonata R&D was client funded in FY18 compared to 57% in FY17). This continues to be positive and creates additional operating leverage opportunity.
Fundamental View
At the FY18 results presentation, the Company provided guidance for FY19 EPS growth to be in the mid-teens. The key to maintaining this rate of EPS growth over the medium term is the extent to which BVS can continue to secure Sonata clients. Recent Company commentary (at the AGM in late November) pointed to a strong sales pipeline for Sonata in new and existing markets. The Company also pointed to further opportunities in South Africa (an existing market with three Sonata clients) as a result of regulatory pressures. However, we note that clarity on the contract pipeline remains limited.
A key factor impacting sentiment recently has been that there have been no contract wins announced since June 2018. Accordingly, BVS would need to broadly maintain its rate of Sonata contract wins (on average two clients each half and ideally, long-term contracts) in order to augment earnings growth over the medium term and to continue to justify the current premium multiple. The stock is currently trading on a 1-year forward P/E multiple of ~24x relative to consensus EPS growth of 13% in FY19 and 14% in FY20. This leaves the shares at risk of falling if they cannot achieve these new contract wins.
Charting View of Bravura
BVS had trended very well during the last year but for the moment it appears as though it might be about to enter a downtrend. After breaking support at $4 several weeks ago, it has struggled to get back above that level. Although there is also some support near $3.40 that it is holding on to. The BVS chart looks slightly negative at the moment and we need to see which line is going to be broken first in order to get an idea about the direction.
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Michael Gable is managing director of Fairmont Equities.
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