Company Overview: Bravura Solutions Limited (ASX: BVS) offers software products and services in the wealth management and funds administration industries. The company’s operations are spread across 8 countries, which includes Australia, New Zealand, Asia, Africa, Europe, the UK, etc. The company’s offerings are spread across two operating segments, namely, Wealth Management and Funds Administration. The company’s key products are Sonata, Garradin, Babel, AdviceOS, Digital Advice, Microservices, ePASS, SuperB, Calibre, and Talisman.

BVS Details

Strong Product Pipeline & Geographical Expansions Aid BVS: Bravura Solutions Limited (ASX: BVS) is engaged in software solutions to clients operating in the wealth management and fund administration industries. Sonata is a BVS solutions’ flagship software product, which provides rich and proven wealth management functionality. The company remains on track to continuously invest in Sonata, to support the client’s demand and extends the product’s market-leading position. Strong growth, increasing scale and greater efficiency are driving increased operating leverage. Subsequent to the substantial product investment and the growth of deep market knowledge and expertise, the company is well placed to capitalise on the significant market opportunity. It is worth noting that BVS has a robust sales pipeline across its key markets and its geographic regions, which aids the company to drive sales opportunities from new clients and significant project activity from existing clients. 

Further, the company aims to expand its addressable market via the strategic buyout of Midwinter and FinoComp. Midwinter is well-positioned to take advantage of continued change in the Australian financial advice industry along with other geographies in which Bravura presently operates. FinoComp has several sales prospects with new and existing UK clients. With these key acquisitions, BVS stands to gain in the long-run.

In FY19, the company’s performance depicted the strength of its product platform, with remarkable growth across revenue, EBITDA, and NPAT. The share of recurring revenue as a percentage of total revenue also increased in addition to new clients and increased demand from existing clients. While revenue of the Wealth Management segment was majorly driven by the performance of the flagship product, Sonata, the Funds Administrations segment also made good progress, leading the digital solutions market. The period also saw a renewal of contracts with the company’s long-term partners, JPMorgan and Citi, for further five years each.

In the time span of 1HFY15 to 1HFY20, the company has reported a top-line CAGR of 13.51%, with 1HFY15 and 1HFY20 revenue amounting to $71.7 million and $135.1 million, respectively. Whereas, for a time period from FY15 to FY19, the company’s top-line reported a CAGR of 14.1%. In the time span between 1HFY15-1HFY20, EBITDA has reported a CAGR of 25.78%, with continuous upward movement On a segment basis, the company has seen a continuous upward movement in the Wealth Management revenue, supported by continued strong growth from Sonata.

Revenues & EBITDA Trends (Source: Company Reports) 

Going forward, the company is well-positioned to benefit from the strong demand for its product portfolio across all key markets underpinned by clients’ need for new products, digital capabilities, navigating, maturing and evolving regulation and extracting operational efficiencies. BVS is prioritising for UK Life & Pensions regulatory changes as growth drivers. The increasing product investment will continue to support the demand from clients and, hence, will deepen product functionality. 

Financial Highlights of 1HFY20: In 1HFY20, for the period ended 31 December 2019, revenue of the company went up to $135.1 million from $127.4 million in 1H19 and EBITDA witnessed an increase from $23.7 million to $25.5 million. Recurring revenue for the period increased 17% year over year and accounted for ~ 78% of total revenue. NPAT for the period stood at $19.8 million, up 21% on previous year NPAT of $16.3 million. Performance during the year was supported by robust growth across the product suite. Sonata, the company’s flagship product continued to deliver strong growth momentum. On the client front, the period was marked by commencement of production for a number of clients along with additional projects for new and existing clients.

Wealth Management Segment Performance: With respect to the Wealth Management segment, which is majorly comprised of the flagship product, Sonata, delivered revenue amounting to $91 million, up 1% year over year. EBITDA for the segment stood at $26 million, down 11% in comparison to the prior corresponding period. Growth in the segment was driven by significant revenue contribution by Sonata from complex projects being delivered for new clients across key geographical markets.

Funds Administration Segment Performance: Revenue for the Funds Administration segment amounted to $44.1 million, up 19% year over year. EBITDA for the segment went up by 44%, from $13.7 million in 1HFY19 to $19.6 million in 1HFY20. Performance of the segment improved on the back of increased project work pertaining to a renewed contract from a significant global client and improved utilisation from the existing client base.

Key Financial Highlights (Source: Company Reports)

Balance Sheet and Cash Flow Highlights: Bravura is in a robust financial position with a cash balance of $100.3 million as at 31 December 2019. The decent financial performance enabled the Board to pay an unfranked dividend of $0.055 per share, bringing the half-year payout ratio to 68% of 1H20 NPAT. The strong financial position added to the company’s capacity to grab organic and acquisitive growth opportunities. Operating cash outflow for 1HFY20 was reported at $3.8 million.

Key Updates:

1. The company recently appointed Ms. Libby Roy as the company’s new independent non-executive director of Bravura, effective from 1 April 2020.
2. As per another recent announcement, Wellington Management Group LLP ceased to be a substantial shareholder for Bravura Solutions Limited.
3. In another update, the company stated that The Northern Trust Company, became a substantial holder of the company, with a voting power of 6.99%

Top 10 Shareholders:  The top 10 shareholders have been highlighted in the table, which together form around 45.17% of the total shareholding. Capital Research Global Investors holds the maximum interest in the company at 6.96%, followed by Northern Trust Corporation Investors holding 5.99% of the shares.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In Dec’19, the company had a gross margin of 92.6%, higher than the industry median of 84.2%. EBITDA margin for the same time span stood at 22.7% as compared to 19.5% in Dec’18. Net margin of the company stood at 14.7% in Dec’19, higher than the year-ago figure of 12.8%.

Key Metrics (Source: Refinitiv, Thomson Reuters) 

Risk Analysis: The company operates in a highly regulated environment with the industry under increased compliance obligations post Royal Commission. This exposed the company to significant compliance burden and material reputational risks for regulatory transgressions. Further, the economic slowdown in China is likely to impact revenues from Asia. Also, stiff competition, foreign currency fluctuation risks along with the potential impact of coronavirus pose risks on the operational front.

Outlook & Guidance: In FY20, the company expects to achieve NPAT growth in the mid-teens on account of strong recurring revenue and new sales opportunities. Acquisitions are likely to make an additional impact of ~$3 million of FY20 NPAT. The company’s product suite is expected to drive further growth supported by continued long term demand from the client base. Going forward, the company is eyeing strong sales opportunities out of significant project activity from existing clients. As the business moves ahead, a strong pipeline of sales opportunities across key markets of the UK, Australia, South Africa, and New Zealand awaits Bravura Solutions Limited.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of the company generated a negative return of 22.22% in the past six months and gained ~5% in the last three months (as at 16 July 2020). The company witnessed growth across key financial metrics, driven by its strong product suite. Wealth Management segment reflected a remarkable growth trajectory on the back of strong client support for Sonata. Furthermore, the company’s funds administration segment is expected to benefit from a pipeline of opportunities and increased operational efficiencies over time. The acquisition of Midwinter will further enhance growth opportunities through the extension of its existing software solutions and is expected to be a good strategic fit for the business. Considering the above factors, decent financial performance and positive long-term outlook, we have valued the stock using the price to earnings multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $4.38, down 0.68% on 17 July 2020.

BVS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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