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 more than 500,000 users and 9,000 businesses worldwide. The role of technology in financial services is increasingly important.

IRE Details

Buyout Synergies and Organic Growth Aid IRE: Iress Limited (ASX: IRE) is mainly involved in IT-based software solutions to the financial services industry and wealth managers. Continuous focus on investment in products and technology, enhanced client service and support, higher geographical diversification, and a recurring subscription revenue model remain key catalysts for the company. On 01 June 2020, the company had inked a deal under the Scheme Implementation Agreement to acquire 100% of the outstanding shares of OneVue Holdings Limited (OneVue). On 6 November 2020, the company informed the market that it has completed the acquisition of OneVue. The combined business of both companies will leverage joint strengths in the administration of managed funds, superannuation, and investment, thereby strengthening IRE’s position in the technology space.  

It is worth mentioning, that the company also acquired QuantHouse in 2019, which offers more than 145 data feeds from exchanges and other data providers to clients globally. Several milestone projects were also implemented including significant deliveries in the UK and Australia to large private wealth management and advice clients. Few other acquisitions that supported the company to well-establish its foundation for future growth were BC Gateways and O&M Systems buyouts. Notably, QuantHouse has transitioned IRE’s business from loss-making at the time of acquisition to a profit contributor in 2020.

QuantHouse Contribution (source: Company Reports)

Talking about 1HFY20, IRE group’s revenue increased from $241.8 million reported in 1HFY19 to $270.7 million, owing to growth in core markets and positive contribution from QuantHouse acquisition. Net profit after tax on a reported basis came in at $26.3 million. Excluding the impact of changes in accounting standards and QuantHouse acquisition, NPAT increased 4% year over year. The company also witnessed strong revenue growth in th UK & Europe segment, which soared 16% year over year, depicting growth in Sourcing and positive contribution from QuantHouse.

Given the consistency of the company’s performance, IRE is re-establishing its FY20 profit outlook. On a constant currency basis of 2020 year, the company expects segment profit (excluding the impact of the OneVue acquisition) to be approximately in-line with 2019 segment profit of $152 million. The company is preparing itself for the broader economic impacts of COVID-19 and is focused on revenue performance and cost management to keep the situation under control. The picture below depicts the company’s increasing trend of mortgage revenues from 1QFY20 to 3QFY20. This positive trend signifies the continuation of all client projects as the year has progressed. 

Mortgages Revenues (Source: Company Reports)

The company remains on track to focus on the health and wellbeing of its people and continue to deliver services on an ongoing basis. Notably, IRE delivered more than 500 client conversions to Xplan in Australia, thus depicting the strength of the ongoing demand in the industry. Further, the company is progressing well with the deployment of Super Admin to ESS Super and Guild. The company remains on track to make decent progress in increasing the share of recurring revenues in this business, which currently stands up to 44% and further targets to achieve more than 70%, in the coming days.

Decent Performance in Q3FY20: During the period, the company reported group revenue amounting to $133.8 million, up 3% year over year, underpinned by strong performance in APAC (+4%) and Mortgages (+19% on constant currency basis). Segment profit for the quarter came in at $37.2 million, replicating an increase of 2% year over year. NPAT for the period amounted to $14.6 million as compared to $14.5 million reported in the year-ago period. Notably, more than 90% of the company’s revenues are recurring in nature. For the first nine months of FY20, revenue went up 8% year over year on a constant currency basis. This incorporates a 3% rise in the company’s organic growth. The company also witnessed a decent performance in Australia, where revenues increased 8%, along with synergies from QuantHouse acquisition.

Q3FY20 Key Highlights (Source: Company Reports)

Segmental Performance: Within APAC, Financial Advice & Superannuation revenue soared 5% year over year on both reported and constant currency basis in 3QFY20. UK & Europe segment’s reported operating revenue increased 2% (on constant currency basis) from the prior corresponding period, depicting synergies from QuantHouse and O&M acquisitions. South Africa segment’s operating revenue decreased by 2% on constant currency basis. 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 declined 6% year over year. Mortgages revenues, on the other hand, soared 19% year over year, on constant currency basis as a result of two clients going live in August 2020. The company expects to go live further on two projects in 1HFY21, depicting a growing level of recurring revenue.

Liquidity Position: At the end of 1HFY20, the company’s cash balance amounted to $100 million and net debt amounted to $48.7 million. Net cash provided from operating activities in 1HFY20 came in at $71.1 million. 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.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 50.92% 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)

Key Metrics: During 1HFY20, the company had a gross margin and net margin of 91% 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.

Key Metrics (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. IRE continues to acquire a large number of companies, which adds to integration risks. It can also adversely impact its balance sheet in the form of an elevated level of goodwill and intangible assets. Moreover, high debt, stiff competition in the markets where IRE operates and regulatory concerns, may dampen the financial performance. Further, uncertainty around Covid-19 transmissions and government restrictions adds to the woes.

What to Expect: The company’s strength in its recurring revenue model will pave greater opportunities in FY20. The acquisition of OneVue and QuantHouse is also performing well and aims to achieve profitability, going forward. The company expects to increase its revenue momentum and improve productivity in Q4. Looking ahead, the company also expects to benefit from the high level of recurring revenue, along with a number of major client projects which are underway. The company is also poised to benefit from additional cost savings. It is also making good progress in expanding its growth opportunities in the UK, super admin, and data. The company has a positive view aided by structural tailwinds as the shift to the digital delivery of financial services accelerates globally. With robust segmental growth and geographical expansion, IRE looks 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 company is taking necessary steps 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. The stock of the company corrected ~2.3% in the past one month ~6.9% in the past three months. The stock of the company has an annual dividend yield of 4.65% and a P/E ratio of 28.2x. The company has a market capitalisation of ~$1.86 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 ~$9.566 and an immediate resistance level of ~$10.429. 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 a few. Considering the recent developments, acquisition synergies, decent Q3FY20 results and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $9.73, up 1.038% on 20 November 2020.

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

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