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 Diversification & Synergies from Buyout: Iress Limited (ASX: IRE) is engaged in offering IT-based software solutions to the financial services industry and wealth managers. The company’s financial performance is bolstered by a continuous focus on client service and support, increasing product and geographical diversification, higher investment in products and technology, and a recurring subscription revenue model. In 1HFY20, the company’s operating revenue from ordinary activities soared 12% from 1H19 and 1% from 2H19, depicting reflecting fundamental growth in Australia, along with synergies from acquisitions of QuantHouse and O&M.

Iress Limited had released an announcement regarding a proposal to acquire 100% of the outstanding shares of OneVue Holdings Limited (OVH) through a Scheme of Arrangement. Recently, the company has increased consideration for the acquisition of OVH. As per the change in consideration, now shareholders of OneValue would receive 43 cents per share as compared to the previous 40 cents per share for their holdings. In addition, on 7th September 2020, Australian Competition and Consumer Commission (ACCC) confirmed that it will not object to the proposed. The acquisition would be financed via a portion of the funds from an equity raising comprised of a fully underwritten placement to raise $150 million, and a non-underwritten Share Purchase Plan for $20 million. Recently, OneVue Holdings’ shareholders have met to vote in favour of the scheme. OneVue’s position in the administration of funds, super and investments, and Iress’ software strength, will drive innovation and demonstrates an opportunity for the development of software and services that will offer significant earnings upside potential to deliver long-term shareholder value. The transaction is expected to be finalised on 6 November 2020.

Talking about 2019, the company 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. Further, the company saw a strong impetus in its superannuation business, with two noteworthy client wins for its super administration offer. In Asia, IRE witnessed strong revenue growth after the successful launch of Viewpoint, an online trading software, to two leading organisations. Revenues from the United Kingdom and Europe, APAC, South Africa, and North America contributed 34%, 52%, 9% and 5%, respectively, of 2019 total revenues.

2019 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. The company remains on track to implement various milestone projects such as significant deliveries in the UK and Australia, thereby strengthening its global footprints. Looking at the past performance, the company’s cash conversion ratio increased from 91% in 1HFY17 to 134% in 1HFY20. The company has a history of delivering sustained shareholder returns, depicting a strong track record of revenue and earnings growth.

Cash Conversion (Source: Company Reports)

Decent 1HFY20 Results: During the period, the company reported group revenue amounting to $270.7 million, up from $241.8 million in 1HFY19, supported by growth in core markets and positive contribution from QuantHouse acquisition. The company’s segment profit on a reported basis stood at $71.9 million, down 8% year over year. Reported NPAT for the period amounted to $26.3 million as compared to $30.4 million reported in the year-ago period. NPAT went up by 4%, excluding the impact of changes in accounting standards and QuantHouse acquisition. The Board declared an interim dividend of 16 cents per share, franked at 35%. Revenues from APAC increased 11% on pcp in 1HFY20, owing to acquisition synergies and higher demand for financial advice software. Financial Advice & Superannuation revenue soared 15% year over year. UK & Europe segment’s reported operating revenue increased 16% from the prior corresponding period, depicting growth in Sourcing and positive contribution from QuantHouse. South Africa segment’s operating revenue increased by 2% on pcp. The company is progressing well on the deployment of private wealth software to a large financial services client. Operating revenue from the North America segment skyrocketed 45% year over year.

Key Financial Highlight (Source: Company Reports)

Healthy Balance Sheet and Decent Liquidity: During 1HFY20, the company had a gross margin and net margin of 91.6% and 9.7%, higher than the industry median of 86.9% and 8.1%, respectively. ROE for the period stood at 5.3%, higher than the industry median of 4.1%. Debt to Equity of the company stood at 0.38x in 1HFY20, lower than 1HFY19 figure of 0.70x, depicting a sound liquidity position. The company exited the period with a cash balance of $100 million and net assets stood at $551.3 million. Net debt at the end of the period amounted to $48.7 million. Net cash provided from operating activities stood at $71.1 million in 1HFY20.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 49.8% of the total shareholding. Challenger Managed Investments Ltd. holds the maximum interest in the company at 9.15%, followed by Greencape Capital Pty. Ltd. holding 8.49% of the shares.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Risk Analysis: The company undertakes certain transactions denominated in foreign currency, exposing the business to foreign currency risk through foreign exchange rate fluctuations. The company is also exposed to interest rate risk, arising from its long-term borrowings at variable rates. IRE’s leveraged balance sheet also poses risks with a borrowing of $148.7 million as of June 30, 2020. Net debt amounted to $48.7 million, with cash and cash equivalent amounting to ~$100 million, indicating that the company needs to be more focused on the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile. Additionally, stiff competition in the markets where IRE operates and regulatory concerns may hamper financial performance.

Outlook: IRE is well-positioned for future growth and remains on track to tap on the future opportunity, particularly in super and trading, data. The company is making a higher investment in product and technology, supporting client retention and future recurring revenue growth. The company also 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 has a strong business with high levels of recurring revenue and cash conversion. The combination of OVH’s strength and position in the administration of managed funds, superannuation, and investments, with Iress’ strength in software and data, would drive innovation through technology. With decent growth in segments and geographical expansion, IRE seems well poised to continue its expansion in FY21.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

P/E 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 4.5% in the past one month ~11% in the past three months. At the CMP of $9.17, the stock of the company has an annual dividend yield of 4.95% and a P/E ratio of 27.1x. The company has a market capitalisation of ~$1.79 billion. Currently, the stock is trading below the average 52-week trading range of $8.290-$14.36. On the technical analysis front, the stock has a support level of ~$9.116 and an immediate resistance level of ~$10.234. Considering the recent developments, acquisition synergies and current trading levels, we have valued the stock using the P/E 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 - Link Administration Holdings Ltd (ASX: LNK), 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 $9.17, down 1.186% on 30 October 2020.

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

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