A fourth earnings downgrade since FY20 leaves investors wary of the company’s outlook statements. There is a large amount of potential work within Bravura’s client base, but it will be at a lower margin than previously thought.
BVS reported 1H22 EBITDA of $25.3 million and net profit of $15.3 million. The result was ahead of 1H21 but was down sharply on 2H21. EBITDA margins contracted more than 700bp sequentially, as much higher employee costs (+15%) weighed it down. Recruitment and retention appears to be a big problem.
Contracted recurring revenue streams continue to expand for BVS but there is a lack of visibility in other revenue areas.
The acquisition of lower margin businesses and wage cost pressures is forcing the market to rethink the sustainable level of margin for this business. It is also likely to be more volatile.
Investment view
A poor 1H22 result and downgraded profit guidance for FY22f does not inspire confidence in the company’s performance. A lower margin profile for the business is likely from hereon and although it may prove to be short term, the higher employee costs are worrying. Licence fees as a percentage of revenue have also declined which may slow down the revenue growth profile.
A number of industry changes such as consolidation among superannuation funds is forcing BVS to adapt its approach to providing more microservices and extending digital cloud services.
The share price has been clobbered by 55% over the last 6 months so that it is now trading on a PE ratio less than 16x FY22f eps.
The silver lining might just be if the share price now represents good value to a competitor. BVS is now on multiples that GBST was trading on prior to the bidding war for that company back in 2019.
Risks to investment view
The re-platforming of Wealth Management businesses could slow down leading to lower revenue for BVS.
Recommendation
We have reduced our recommendation to Hold.
