Morgan Stanley hikes target price on Aveva despite "high" valuation

Analysts at Morgan Stanley hiked their target for shares of Aveva on Monday, from 3,150.0p tp 3,925.0p, highlighting the software maker's "very strong" operational execution in 2019 and the shift in investor perception since the start of 2018 following the acquisition of SES.

The latter, they said, had transformed the narrative around the company from one of a firm heavily exposed to capital expenditures in the Oil&Gas sector which while highly cash generative was cyclical to one of an outfit that was "far more" diversified and "driving process industry digitalisation".

Despite the tough comparatives after growth of 124% in 2018 and as tailwainds ease, the investment bank bumped up its forecast for growth in 2020 from 6.3% to 7.0%.

A shift from licenses to rentals/subscriptions would be a hurdle, but they also expected Aveva to benefit from "strong underlying momentum" and, perhaps, IFRS 15 revenue recognition on multiyear contracts.

Yes, trading at 4,000.0p, the shares were sporting a high valuation, they conceded, trading on an adjusted price-to-earnings multiple of 34 times the broker's estimate for its calendar year 2020 earnings.

But the median P/E for its peer global design peers was at 36.0 times

And its price-to-growth, while at 2.7, was less than the mean for the sector of 2.8.

As well, Morgan Stanley believed investors would prefer its organic growth, relative to peers', the structural expansion in its margins thanks to SES and their view that the risk to revenue forecasts lay to the upside.

Morgan Stanley kept its recommendation for the shares at 'equalweight'.