Valuation Detail (1/7/21)

Attached is the valuation detail and the valuation has the general information and analysis of the company and products, below are the assumptions that drive the calculation of the IV.

IV = $6.05 (base case)

Valuation Assumptions:

·         The base case assumes BVS will grow its share of the Wealth Management and Funds Administration markets in ANZ and the UK with only a small contribution from other markets.  I have accepted FY21 guidance (see summary below) and the first year forecasted in FY22 to FY31.

·         Sales Growth: I expect a Covid recovery and return to strong sales growth as BVS cycles into its new subscription-based revenue model, producing mid to high teens % growth for a few years lead mainly by the UK market which grows to double ANZ by 2031.

·         Gross Margin: Expect this to tick up from already very high 92% to 94% over the next 10 years on the back of scale and process efficiencies.

·         EBITDA%: Opex spend at 75% will benefit from operating leverage and I have this reducing to 65% by 2031 which drives EBITDA% growth from 27% to 37%.

·         Tax: Normally not a variable, but due to AU and UK tax rate differences and tax effects of investments and R&D the average tax rate is well below corporate tax rates, so I have assumed a 25% average effective rate which is very conservative when compared to history.

·         Capex: BVS has been and will continue to be driven by investment in it’s products, but the need to generate FCF will persist so I have this growing at half the rate of sales.

·         Share Count: Nominal growth of 1% for ESOP, assume that any capital raisings for acquisitions are EPS accreditive so would have neutral or positive value impact.

·         Discount: Take average long term market risk rate of 10%, terminal value based on EV/EBITDA multiple of 10 which is equivalent to a P/E of 15 and perpetual growth of 3%, again around market long term averages.

·         Risk & Opportunity: No discount for risk due to a strong cash position, large and relatively secure customer base as well as the likely entry of a buyer if BVS becomes distressed in any way.  Opportunities in terms of markets outside of ANZ & UK that are not factored into the base case as well as upside from additional acquisitions I am allow for a 10% premium.

BVS is somewhere between a dividend and growth stock, which means that both upside and down side are limited.  It is clear that the industry is growing but it is also consolidating and due to the diversity of products and services BVS offers to those in the finance industry it is hard to get a handle on a revenue KPI to guide assumptions on growth.

None the less it has up until Covid grown strongly and I expect that as the UK opens up more with vaccination rates sales will recover and growth return.  Management have done well so far with organic and acquired product and sales growth, so the money is on them to continue.

I own BVS as a bit of ballast in what is generally a high growth portfolio, but my position is in the red. I am looking for them to return to growth post Covid but more importantly I am looking for them to return to FCF’s positive.  It may be another 6-12 months before we see evidence of either.

Company FY21 guidance:

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.

Restructuring: As a result of reduced professional services work, headcount was reduced by ~5%. The reduction in headcount resulted in A$2.6m in restructuring costs in the period. Restructuring is expected to reduce costs by ~A$5.5m in 2H21 compared to 1H21 and deliver A$11.5m on an annualised basis.