My favourite ASX turnaround story of 2023-24

Bravura Solutions (ASX: BVS) has to be one of my favourite turnaround stories of 2023-24. The stock has more than tripled from its March 2023 low but is still down around 80% from all-time highs.

Bravura is a global provider of wealth management and fund administration software solutions. The company faced numerous setbacks between 2020-22 including stagnant growth, growing losses, high debt and numerous changes to management.

In this educational piece, we're taking a look at the key drivers of its recent turnaround and how this may apply to future cases.

But first ... how did we get here?

The stock was in a downward spiral between June 2020 and February 2023. The AFR covered most of its major catalysts and sell-downs, including:

• March 2020 – Non-Exec Peter Mann offloads $168,000 on 21 February 2020 and the stock almost halved just four weeks later

• June 2020 – Major holder drops its 7% stake

• March 2022 – Major shareholder offloads 6% stake

• February 2023 – Bravura deferred its results, saying it needed more time to consider performance, guidance and a potential capital raising

• March 2023 – Bravura seeks to raise $80 million at a 53% discount

• June 2023 – Bravura loses its CEO after less than one year

The turnaround cap raise

Bravura successfully raised $66 million at a steep 53% discount to its price prior to the date of the capital raise. A 53% discount effective says "we desperately need cash and we're happy to sacrifice whatever is needed".

The company said the fresh cash will be used to fund investment in its Operational Change Program, fund negative cash flow and provide balance sheet flexibility.

The capital raise was announced in parallel with its first-half FY23 results. Some highlights include:

• Revenue down 11% to $118 million

• EBITDA loss of -$7.0 million (down from $25.3 million in 1H22)

• Adjusted net profit loss of -$14.2 million (down from $16.1 million profit in 1H22)

• Non-cash impairment of $176 million including $163 million of Goodwill and $13 of work in progress development

From a strategy perspective, the company said it had "developed a clear strategic plan that targets a return to profitability, underpinned by clearly defined business outcomes and financial targets."

A key part of this strategy was its Organisational Change Program, which targets approximately $25-30 million in annualised cost benefits. The costs associated with the change program will be approximately $19-24 million.

Judging by the above losses and proposed savings – It could really turn things around for the bottom line.

Share price perspective

Bravura shares plunged 54% following the capital raise (7 March 2023), which was pretty standard given the 53% discount offered to new shareholders/shares.

Surprisingly, the stock fell another 25% by 17 March 2023 to a record low of 29 cents. I guess nobody wanted to stand within 10 feet of this dumpster fire. But at record lows, the company had a market cap of $120 million and approximately $85 million cash or an enterprise value of just $35 million. In layman's terms, the company was sitting on a mountain of cash (relative to its market cap), which creates a lot of leverage... it just needed to execute.

The stock bounced off record lows in late March 2023 and spend the next five months trading around the 45-50 cent mark.

Bravura share price chart (Source: TradingView)

For a stock that's been subject to so much volatility, such consolidation suggests that panic selling has subsided and holders are content with the current state of the business.

This calmness should be a good thing. And it was.

Turnaround gathers momentum

Bravura announced its FY23 result on 25 August 2023. Here are the key highlights:

• Achieved guidance across all metrics with $75.7 million cash balance

• Revenue down 6.4% to $249.6 million and adjusted net loss of -$23.1 million

• "Bravura’s trading performance has driven the requirement and urgency for change. This has resulted in a new CEO, Chair and refreshed board joining Bravura in 2HFY23."

• Organisational Change Program to be completed ahead of schedule, by June 2024 and generate annualised savings of $40 million

• Guided to positive cash EBITDA run rate by the end of FY24

• Putting it all together – No ugly surprises, a new management team and the all-important change program will be completed ahead of schedule

The stock finished the session up 44% to $0.72 and traded largely sideways through to November 2023.

At its November AGM, the company provided an FY24 guidance upgrade which included:

• Revenue to be "around the same as FY23"

• EBITDA between $10-15 million (up from -$0.3 million in FY23)

• Organisational change program to deliver annualised gross savings of $47 million

• Capex and lease costs of $16 million (down from $28 million in FY23)

• Putting it all together – the company is set to hit positive EBITDA ahead of schedule and the change program is realising more savings

The stock rallied another 16.7% to $0.80 cents.

The company's latest half-year report on 20 February 2024 reported:

• Gross revenue up 7.4% to $127.0 million

• EBITDA of $7.9 million, up from -$3.6 million in 1H23

• Upgraded FY24 EBITDA guidance to $18-22 million

• "Now that the business is stable and well capitalised the business is proceeding to formulate a capital management strategy in 2H24."

• Putting it all together – The turnaround is gathering momentum and earnings outlook has been upgraded. The stabilisation of business has allowed the business to explore a capital management strategy (e.g. possible dividends).

The stock finished the session up 29.7% to $1.25.

Where could you have gone wrong?

#1 Trying to pick the bottom: Bravura shares experienced high volatility for most of 2020 through to early 2023. The stock spent most of this time spiralling lower, with the occasional bounce from oversold levels.

Bravura weekly chart (Source: TradingView)

#2 The deceptive calmness: In the above weekly chart, you'll notice a period of volatility contraction in late 2022 followed by a massive dip. On 2 November 2022, the company announced its strategic review progress and FY23 guidance. This announced flagged FY23 earnings that "differ materially from analysts' consensus forecasts". Prior to the selloff, the company had a market cap of around $300 million and $48 million cash.

Things to look out for

• Is the business well capitalised: As we noted above, Bravura had a market cap of $120 million with approximately $85 million cash after the capital raise

• Share price consolidation: Bravura traded within an extremely narrow range for more than three months

• A turnaround is taking place: Bravura's FY23 result, November AGM and 1H24 result all contained positive surprises. The turnaround is clearly gathering some momentum

Another case study

Spartan Resources (ASX: SPR) has a similar turnaround story, where the company gave up on a loss making mine and turned into a gold exploration success story. Its turnaround also included a massively discounted capital raise and a period of prolonged share price consolidation.

I won't go into much detail (you can do the homework) but I'll leave the key announcements below:

• 27 Feb 2023: Gascoyne Capital Raise Presentation

• 9 March 2023: Reinstatement to Quotation

• 2 May 2023: Exceptional High-Grade Results from Drilling at Never Never

• 16 May 2023: More High-Grade Assays Highlight Never Never Potential

• 7 July 2023: Significant Assays Results Outside Never Never MRE

• 24 July 2023: Never Never Resource Increases to Over 720koz

• 17 October 2023: New Gold Discovery north of Never Never

• 14 November 2023: Spectacular new high-grade gold intercepts up to 1,093g/t

• 14 December 2023: Never Never hits 952,900oz @ 5.74g/t