Forum Topics BVS BVS Lessons to learn
BoredSaint
Added 3 years ago

Bravura was one of the first companies in which I purchased following a drop in share price after results were released in Aug 2020. At the time the business was blaming Covid for a depressed half and there was a sense that if they could recover their growth from previous years, that this looked cheap trading at a PE of between 20-30x compared to some other wealth management platforms.

I have today decided to exit my position at around a 50% loss. I am less concerned about the money lost but more wanting to see what lessons can be gained from this experience.

Maybe something that comes to mind is that when sometimes is trading at substantial discount (on a PE level) compared to its peers there is usually a reason for this. Management have continuously downgraded guidance, first blaming covid and lately blaming increased operating costs. Perhaps they were unlucky because 2 of their growth areas were the UK and South Africa who have both been severely affected by the pandemic. However, at what stage does this just become more related to poor execution from management. I guess time will tell if they do manage to complete their projects in FY23 as stated in their results presentation today. For me, I would rather invest my remaining funds into better companies with better management teams who have a track record of executing their strategy and plans.

I see @Strawman you also exited your position today. Any thoughts?

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Strawman
Added 3 years ago

Yeah I'm with you @BoredSaint

My mistake here was not having a better grasp on the industry dynamics.

Bravura had delivered reasonable growth for a while there and it seemed to have good momentum. While it's reasonable to lay some blame on covid, the business has shown itself to be less resilient that I thought.

As I said in my straw at the time:

Given it has very favourable economics and high profitability (even in a bad year they declared a record 6cps final dividend), as well as a good history of growth, it's hard to spot anything too dire in these results. 

"If the business can resume some good revenue momentum the current PE of 22 doesnt seem too onerous. Especially with a 2.5% dividend yield.

That being said, it's a tough competitive environment and customers operate in a cyclical industry -- any continued stall in growth wont be treated kindly by the market."

The hard part is trying to work out whether the stall in growth is temporary or more structural. I can see a scenario where, after a year or so, customer confidence returns and they score a big half. In a less skittish market environment they could also see a good multiple rerate.

But, I just can't build strong conviction in this view. So, when in doubt, get out!

Another factor was that I needed to free up some cash on my Strawman portfolio because I wanted to buy some Halo Foods (@TEPCapital stock pitch was pretty convincing!).

As you say, it's all about opportunity cost.

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BoredSaint
Added 3 years ago

Yeah I feel like I've held on because I had some conviction that a turn around was still possible but since this last report I feel like I have lost this conviction.

And with the recent fall in other companies I find much more compelling it is absolutely the opportunity cost that is weighing on my decision here.

Now that we've both exited I expect it to re-rate and double from here! Such is the market isn't it.. Who knows maybe there's a takeover offer brewing from the other Wealth Management platforms..

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BoredSaint
Added 3 years ago

@NewbieHK I'll reply here since I can't reply to your straw.

At the current share price ($1.665) I can certainly see a short term thesis for starting a position. MC is around $413.5m, a trailing dividend yield of 5.2% and a PE of around 16x at their low end of guidance. I can also see a possibility of takeover from one of the other Wealth Management platforms at a premium to the current price. The business itself is profitable, has no debt and a high rate of recurring revenue and so I think the risk of it going to 0 is quite minimal. However, for the share price to increase either profits have to increase, or the market has to be willing to price it at a higher multiple than what it is currently willing to pay for. I can't see either occurring in the short/medium term and hence have exited my position. Whether the dividend yield is sustainable on decreasing profits is also debatable.

After following this company since around Aug 2020, and having downgrade after downgrade, I myself and I believe the market has lost faith in the ability of this management team to execute their targets. I'll provide some examples below.

FY2020 results (Aug 2020)

"While the new sales pipeline remains strong, due to the wider impact of COVID-19 there is greater uncertainty in the timing of deal closures when compared to prior years. It is therefore possible that FY21 NPAT will be similar to FY20."

FY20 NPAT was around 40.1m

1H FY21 results (Feb 2021)

"The impact of COVID-19 in the UK and South Africa is expected to continue to affect the business in 2H21. However, the sales pipeline is strong. Accordingly, Bravura anticipates delivering revenue growth from 1H21 to 2H21 in excess of 10% and achieving FY21 NPAT of A$32m to A$35m."

FY2021 results (Aug 2021)

NPAT came in at $31.3m excluding the acquisition of Delta Financial Systems which cost $42m to acquire

"The COVID-19 pandemic continues to impact Bravura’s key markets. The near-term outlook remains uncertain. However, the sales pipeline remains strong, demand in the UK is beginning to improve, and there are significant opportunities for Sonata Alta in Australia. Bravura currently expects FY22 NPAT growth in the mid teens relative to FY21 adjusted NPAT of A$32.3m."

1H FY22 results (Feb 2022)

"Our sales pipeline continues to build, however some opportunities are shifting to FY23. We are also seeing operating costs increasing at a similar rate to revenue. FY22 EBITDA will be in the range of $45m to $50m and we are now revising our guidance for FY22 NPAT to be in the range of $25m to $30m, which is below previous guidance provided at the November 2021 AGM"

Now for sure if indeed their opportunities shifted to FY23 then I believe there will be a short term rerate (if they achieve these targets) as the Revenue and NPAT increase would be substantial from FY22 to FY23. However in the short term I can't see where they can generate any growth, if even acquiring in FY21 has made them go backwards. I think I have learnt that Investing is not only about looking at the numbers but also looking at the qualitative factors behind the management team running the business you have invested in. If I have lost such faith in the team then I believe there may be better opportunities else where.

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thunderhead
Added 3 years ago

Good post @BoredSaint, and 100% agree that you can't invest based on that recent track record.

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NewbieHK
Added 3 years ago

Great Summary! Appreciate you taking the time to articulate your response.

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Solvetheriddle
Added 3 years ago

Hope this is not too harsh but my 2c is that less than 2 years following a stock is too short a timeframe to build and judge those qualitative factors. Also in the fast changing world of mid to small IT I would be weary of sales stalling, always many excuses but it may be product issues or go to market problems, both bad.

7

nerdag
Added 3 years ago

I agree 2 years is too short. Bravura have had these issues for the 5 years I have held on, hoping management turn it around.

I'm still holding because my holding is now so small that it's not a big opportunity cost to hold on.

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