New CEO Libby Roy’s strategic review of BVS has resulted in a significant step-up of the cost base to reimagine the technology offering. Operating costs +20% than previous assumptions.
The review highlights further hits to earnings. Decline in high margin licence revenue, a slower than expected transition to microservices and the winding down of three high margin legacy contracts.
Bottomline: significant margin compression and cash burn in FY23E. BVS guidance implies a ~70% hit to earnings, coupled with operating cash burn. BVS guidance for FY23 Net Profit is -A$5m to zero.
The outlook for earnings recovery from FY24E also looks challenging. A return to pre-COVID margins of ~20% looks very difficult to achieve over FY24-25E.
There are few positives in the update. Revenue should still be able to grow into FY25E driven by new client wins in Asia Pacific – but these are lower margin than what the group has previously earned.
The balance sheet has A$49m of cash as at June 30 2022, which is likely to fall to ~$20m in FY23E and FY24E. The Group will burn cash this half, with BVS guiding to positive cash flow in the 2H23. In addition, BVS has $19m of undrawn debt so balance sheet issues near term are relatively low.
Investment View
With more details of the strategic review to be shared with investors later this month at the AGM, the size of earnings hit and reset of the business leaves investors gasping.
Given the level of reinvestment taking place, it is highly uncertain what the payback will be on this reinvestment or the timing. The market is likely to be highly sceptical of this reinvestment given visible measures of success are likely >2 years away.
What’s BVS worth? If we assume $300m of revenue in FY24E, up from ~$270m in FY22E, apply an 8% EBITDA margin, BVS can generate $7m of NPAT, equating to PER of 24x FY24E.
Domestic software providers trade on 20x PER, wealth management focused software companies trade at 30x PER. In our view, we don’t see a fundamental reason for BVS to re-rate near-term.
Corporate interest cannot be ruled out. Ironbridge Private Equity previously owned BVS, and nature of this scale of earnings turnaround is arguably better suited to the private market investors. The group has received interest in the past, and whilst the strategic review highlights underinvestment in the core technology platform, the Group is capable of generating ~$300m of annualised revenue. We elect to maintain a Hold rating on BVS.
Risks To Investment View
Strategic review has left BVS vulnerable with materially lower earnings base over the next few years. The scale of the strategic reset leaves the group vulnerable to further earnings deterioration and or M&A interest.
Further slippage in recurring revenue contacts which >70% of Group revenue would be a material headwind for the share price.
Recommendation
We have retained our Hold recommendation.
Figure 1: BVS PER Ratio. Loss making in Fy23e. return to profit in FY24E has BVS trading on PER ~24x Fy24E.
Figure 2: BVS Earnigns Trajectory into 2025E looks challenging.
