Company Overview: Iress Limited (ASX: IRE) is engaged in providing information, trading, compliance, order management, portfolio and wealth management, and related tools. The company has its operations across Asia-Pacific, Australia, New Zealand, North America, Africa, and the UK & Europe. Notably, the company’s software is utilised by greater than 500,000 users and 9,000 businesses worldwide. The role of technology in financial services is increasingly important.
 

IRE Details
 

 
 
IRE Rides on Geographical Expansion & Acquisition Synergies: Iress Limited (ASX: IRE) is engaged in offering IT-based software solutions to the financial services industry and wealth managers. During the year ended 31 December 2019, the company generated revenue amounting to $508.9 million, representing an increase of 10% on prior corresponding period. On a constant currency basis, revenue increased by 8%. The strong financial position depicts the continuous demand for the company’s software and services, as financial market participants worldwide are seeking expertise in transitioning to more cost-effective, data-driven ways of working. Revenue growth for the period also reflected a strong contribution from Australia and the United Kingdom, along with the QuantHouse acquisition. The company also witnessed strong revenue growth in New Zealand & Asia. Further, the company’s private wealth software gained momentum on the back of two major retail firms selecting IRE in 2019. Moreover, the company saw a strong impetus in its superannuation business, with two noteworthy client wins for its super administration offer. In Asia, the company experienced robust revenue growth after the successful launch of Viewpoint, an online trading software, to two leading organisations. The composition of revenue based on the region came in as ~52% from APAC, ~34% from the United Kingdom and Europe, ~9% from South Africa and ~5% from North America. Reported NPAT for the year stood at $65.1 million, increasing 2% year over year, whereas EBITDA for the year amounted to $133.9 million, up 14% on pcp.
 
Key initiatives during the year included the introduction of IRESS automated super offering which helped the clients to grow their business by providing digital advice to their customers. The company’s IRESS Labs which helps to co-designs software with users was moved from 10% of core products operating within the Labs framework to 77% of core products in 2019. The period was also marked by the acquisition of market data provider, QuantHouse, which offers more than 145 data feeds from exchanges and other data providers to clients globally. The acquisition expands IRE’s offering to clients globally. Several milestone projects were also implemented in FY19, including significant deliveries in the UK and Australia to large private wealth management and advice clients.
 
Over a period of 2015 to 2019, the company has reported top-line CAGR of 8.93% with revenue in 2015 and 2019, amounting to $361.5 million and $508.9 million, respectively. Net profit CAGR over FY15-FY19 was reported at 4.13% with 2015 and 2019 profits amounting to $55.4 million and $65.1 million, respectively. The company has a history of delivering sustained shareholder returns, depicting a strong track record of revenue and earnings growth. Since 2009, revenue generated from the operations has been trending upwards with ~10% growth in FY19. Revenue in FY19 increased due to strong overall performance, accompanied by improved operating leverage that helped earnings during the period.
 

Key Trends (Source: Company Reports)
 
Going forward, the company has a well-established foundation in place for future growth. In the second half of 2019, the company secured two clients for its technology-led super administration offering which is expected to contribute to future revenue growth. The company remains on track to tap on the future opportunity, particularly in super and trading, data. Moreover, further scalability will bring 2020 investment ahead of revenue. The company is making a higher investment in product and technology, supporting client retention and future recurring revenue growth.
 
1H19 Financial Highlights: In FY19, the company reported group revenue amounting to $508.9 million as compared to $464.6 million in FY18. Revenue growth during the period was supported by growth in core markets and positive contribution from QuantHouse acquisition. On a reported basis, the company’s segment profit stood at $152.1 million, up 10% on prior corresponding period profit of $137.7 million. Reported NPAT for the period amounted to $65.1 million as compared to $64.1 million reported in FY18. NPAT went up by 11%, excluding the impact of changes in accounting standards and QuantHouse acquisition. The Board declared a final dividend of 30 cents per share, franked at 40%. This brings the total dividend payable for FY19 to 46 cents per share (franked at 30%).
 

FY19 Financial Results (Source: Company Reports)
 
Segment-wise Results:
 
APAC: Operating revenue for the segment stood at $264.5 million, up 5% on prior corresponding period revenue of $252 million. During the period, growth was driven by the demand for financial advice software and QuantHouse acquisition. Financial Advice & Superannuation revenue witnessed a rise of 6% year over year.
 
UK & Europe: This segment’s reported operating revenue increased 20% year over year, on the back of ongoing delivery to key clients, continued solid growth in Sourcing and positive contribution from QuantHouse. 
 
Mortgages: Revenue for the segment went up by 1% in 2019 on pcp, while direct contribution fell 11% year over year. In local currency, revenue and direct contribution declined 2% and 14% respectively, year over year, indicating the timing and mix of client projects.
 
South Africa: The segment’s reported operating revenue increased 4% on prior corresponding period. Direct contribution for the period went up 6% year over year. The company is progressing well on the deployment of private wealth software to a large financial services client.
 
North America: Operating revenue for the segment increased 32% on prior corresponding period, while direct contribution increased 8% year over year. Performance of the segment was characterised by stable recurring revenue and a positive revenue contribution from QuantHouse.
 

Segment Highlights (Source: Company Reports)
 
Balance Sheet $ Cash Flow Highlights: At the end of 31 December 2019, the company’s cash balance amounted to $33.4 million and net assets stood at $434.9 million.Net debt at the end of FY19 amounted to $194.9 million. Net cash provided from operating activities in FY19 came in at $104.7 million. Net cash used in investing activities and financing activities came in at $33.5 million and $71.1 million, respectively.
 
Recent Updates:

1. In a recent update, the company announced that it has acquired O&M Systems in the United Kingdom, a provider of pension and investment data and comparison tools. The acquisition will strengthen IRE’s already broad advice offering in the UK.

2. Recently, the company notified that Pinnacle Investment Group Limited, a substantial shareholder of the company, has decreased its voting power from 9.47% to 8.39%. Another announcement notified that Hyperi0n Asset Management Limited, another substantial shareholder of the company, has decreased its voting power from 9.81% to 8.66%.

 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 54.15% of the total shareholding. Hyperion Asset Management Limited holds the maximum interest in the company at 8.66%, followed by Pinnacle Investment Management Group Ltd holding 8.39% of the shares.
 

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: During FY19, the company had an EBITDA and gross margin of 26.8% and 91.6%, higher than the industry median of 25.9% and 70.5%, respectively. Operating margins margin for the period stood at 18.7%, higher than the industry median of 11.1%. ROE for FY19 stood at 15.2%, higher than the industry median of 6.5%.
 

Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Outlook: The company remains on track to foresee and respond to the COVID-19 situation and remains focused on supporting the well-being and health of its people, service continuity to clients and users, and assistance to the community. The company is also taking necessary measures to include business-critical teams, in order to work remotely for an extended period of time. These initiatives will help the company to stay afloat during the time of COVID-19 crises and will help it to emerge stronger in the future. 
 
For FY20, the company had underpinned a strong fundamental, with high rates of recurring revenue and cash conversion, and a conservative balance sheet. It is to be mentioned that in the early part of 2020, the company’s operations performed in accordance with the expectations with no material revenue impact because of COVID-19. However, due to widespread uncertainty surrounding the current scenario, the company finds it prudent to withdraw its FY20 guidance. Nonetheless, the company remains underpinned by a strong balance sheet and financial position. We believe, with robust segmental growth and geographical expansion, IRE looks poised to continue its expansion.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

 
EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters
 
Stock Recommendation: The stock of the company corrected 24.5% in the past one year but went up ~5% in the past one month. At the CMP of $10.92, the stock of the company has an annual dividend yield of 4.23% and P/E ratio of 28.71x. The company has a market capitalisation of ~$1.91 billion and ~175.92 million outstanding shares. Currently, the stock is trading slightly below the average of 52-week trading range of $8.290-$14.74. Considering the recent developments, acquisition synergies and current trading levels, we have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of lower double-digit upside (in percentage terms). For the purpose, we have taken the peer group - Tyro Payments Ltd (ASX: TYR), EML Payments Ltd (ASX: EML), Bravura Solutions Ltd (ASX: BVS), to name few. Hence, we recommend a “Buy” rating on the stock at the current market price of $10.92, up 0.368% on 8 May 2020.

 
IRE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)