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 include 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

Geographical Diversification and Robust Product Pipeline 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 Limited’s flagship software product, which provides rich and proven wealth management functionality. The company supports its clients, with greater than 1,400 employees in 18 offices across Australia, New Zealand, United Kingdom, Europe, Africa, and Asia.

Sonata is the core of BVS’ product ecosystem and it 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. Notably, BVS has a robust sales pipeline across its key markets and its geographic regions, which aid 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 BVS presently operates. FinoComp has several sales prospects with new and existing UK clients. Both the buyouts are delivering robust sales pipelines and will aid BVS to gain in the long run.

Over FY15-FY20, BVS witnessed a top-line CAGR of ~12.51%, with FY15 and FY20 revenue amounting to $152.1 million and $274.2 million, respectively. A full-year dividend of 4.5 cents per fully paid ordinary share was declared for FY20, up 29% year over year. In the time span between FY15-FY20, EBITDA has reported a CAGR of 26.99%, 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.

Past Performance (Source: Company Reports)

As the world is fighting against the novel coronavirus led crisis, the company’s mission to deliver innovative technology solutions that power leading financial institutions has never been more crucial. During the pandemic, the company’s clients continue to experience BVS’s high service levels, without disruption. In FY20, BVS continued to deliver growth in revenue and expand its operating leverage, with a 7% increase in recurring revenues. The company stands to gain in the long-term on the back of its strategic partnerships along with the loyalty of its existing clients using its product functionality. BVS ended FY20 with a solid net cash position of $99.1 million. Looking ahead, the company is well-positioned to benefit from the strong demand for its product portfolio across all key markets. 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.

In FY20, 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.

FY20 Key Financial Highlights: In FY20, for the period ended 30 June 2019, revenue of the company went up to $274.2 million from $257.7 million in FY19 and EBITDA witnessed an increase from $48.6 million to $57.8 million. Recurring revenue for the period increased 7% year over year and accounted for ~77% of total revenue. NPAT for the period stood at $40.1 million, up 22% on previous year NPAT of $32.8 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. 

The company’s Wealth Management segment reported revenues of $180.4 million, up 2% year over year, owing to higher revenue contribution by Sonata from complex projects being delivered for new clients across key geographical markets. Revenue for the Funds Administration segment amounted to $93.8 million, up 16% year over year 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.

FY20 Financial Highlights (Source: Company Reports)

Balance Sheet and Cash Flow Details: BVS is in a robust financial position with a cash balance of $99.1 million as at 30 June 2020. The decent financial performance enabled the Board to pay a final dividend of 5.5 cents per share bringing the full-year payout ratio to 67% of FY20 NPAT. The strong financial position added to the company’s capacity to grab organic and acquisitive growth opportunities. Lease liability at the end of the period stood at $42.3 million. Total operating cash flow for FY20 was reported at $19.4 million.

Cash Position (Source: Company Reports)

Top 10 Shareholders:  The top 10 shareholders have been highlighted in the table, which together form around 39.99% of the total shareholding. Capital Research Global Investors holds the maximum interest in the company at 6.96%, followed by Mawer Investment Management Ltd. Investors holding 6.17% of the shares.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Ratio Metrics: In FY20, the company had a gross margin of 92.2%, higher than the industry median of 81.1%. EBITDA margin for the same time span stood at 25.2% as compared to 20% in FY19. Net margin of the company stood at 14.7% in FY20, higher than the year-ago figure of 12.7%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company operates in a highly regulated environment with increased compliance obligations post Royal Commission. This exposed the company to significant compliance burden and material reputational risks for regulatory transgressions. Additionally, 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.

Future Expectation: While the new sales pipeline remains strong due to the wider impact of COVID-19, the company expects FY21 NPAT to be in-line with FY20. 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 9.64% in the past six months and is currently trading below the average of its 52-week trading range of $2.92 - $5.98. 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. Also, 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. On a technical analysis front, the stock has a support level of ~$3.02 and a resistance level of ~$4.47. 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). For the purpose, we have taken peers such as EML Payments Ltd (ASX: EML), Hansen Technologies Ltd (ASX: HSN), Iress Ltd (ASX: IRE) to name a few. Hence, we recommend a “Buy” rating on the stock at the current market price of $3.41, down 1.729% on 02 October 2020. 

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

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