GOLDMAN SACHS

BUY

Bravura Solutions Ltd.

(BVS.AX)

Compelling valuation and recovery beneficiary; Buy

25 August 2021 | 10:02PM AEST

BVS has guided to solid mid-teen FY22 NPAT growth; seasonality should be slightly 2H weighted but far less pronounced than FY21. In our view the share price reaction today (-16%) may be overdone. The mid-point of guidance implies only 2% downgrade to consensus NPAT (Bloomberg); we downgrade our FY22/FY23E EPS by -1.9%/-5.5%. The departure of CEO Mr. Tony Klim may have come as a surprise; he has been CEO for 10 years and has been replaced by Mr. Nick Parsons. Mr. Parsons has been with BVS since 2007, appointed as CTO. He has undertaken a range of senior leadership roles in the business, most recently as Global COO. Our updated forecasts imply +12% 3-yr EPS CAGR. The stock is trading at a 29% discount to the FY22 Small Industrials Index, which we think makes the stock a compelling investment in the current environment.

There are a number of opportunities which are driving the rebound in earnings in FY22 and beyond: (1) a resumption of projects among existing UK clients that were previously on hold due to COVID; (2) a pipeline of new work in the UK that has recovered to pre-COVID levels and includes opportunities across cloud and micro-services; (3) an opportunity to sign further Sonata Alta deals with Australian super funds; before eventually also targeting similar opportunity in the UK.

The medium term opportunity for BVS is significant:

• With c.??1.2bn TAM in the UK and c.A$1.0bn TAM in Australia; BVS has c.10% market share in the UK and c.5% in Australia, which provides a meaningful growth opportunity.

• The transition from a traditional licence contract model to a SaaS model is a key strategic driver for BVS, and should shift earnings to be ~70% recurring. BVS has indicated structural demand for SaaS, microservices, cloud and subscription-based services is strong.

• BVS has a strong balance sheet (A$74mn net cash as of Jun-30) which provides flexibility to pursue further M&A. The company indicated nothing is imminent, but it continues to assess a pipeline of opportunities.

Given the timing of the UK recovery, FY22 guidance implies a 2H weighting. As a result of the earnings changes, our 12m TP falls 5% to A$3.70. With this offering 20% total return, we remain Buy rated.