Company Overview: Iress Limited (ASX: IRE) is involved in offering information, trading, compliance, portfolio, order management, and wealth management, and related tools. The company has its business operations across Asia-Pacific, New Zealand, Australia, 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.

IRE Details

IRE Rides on Buyout Synergies & Robust Product Adoption: Iress Limited (ASX: IRE) is engaged in offering IT-based software solutions to the financial services’ industry and wealth managers. The company remains on track to leverage the cloud infrastructure on the back of higher demand from its clients. The company aims to automate software deployment, which, in turn, will aid IRE to deliver the desired speed and scale in its business operations. The Iress Cloud Platform (ICP) remains a key catalyst and is now leveraged by a variety of products to support production activities. Notably, in FY20, the company transferred ~1,000 client sites to the cloud.

Over a period of 2015 to 2020, the company has reported a top-line CAGR of 9.3% with revenue in 2015 and 2020, amounting to $350 million and $546 million, respectively. Net profit CAGR over FY16-FY20 was reported at 2.9%, with 2016 and 2020 profits amounting to $81.8 million and $94.2 million, respectively. Looking at the past performance, the company’s cash conversion ratio increased from 93% in FY16 to 108% in FY20. The company has a history of delivering sustained returns to its shareholders, depicting a strong track record of revenue and earnings growth.

Key Trends (Source: Company Reports)

The company remains on track with its acquisition strategy, which helps it to expand its customer base, headcount, and operations, expand its service offerings across industries, and improve revenues. The year 2019 was marked by the acquisition of market data provider, QuantHouse. The acquisition expands IRE’s offering to clients globally. Further, in 2020, the company acquired OneVue Holdings Limited (OVH) through a Scheme of Arrangement. The integration of OneVue’s administration of funds, super and investments, along with Iress’ software strength will drive innovation and will bring opportunities for the development of software and services that will offer significant earnings upside potential and enhance shareholders’ value. Further, the move will aid the company to offer the implementation of investment advice from Xplan. IRE’s strategies involve building a new, efficient, and clear investment infrastructure-as-a-service to take part in the $3 billion annual revenue pool of retail investments. The company remains on track to implement various milestone projects such as significant deliveries in the UK and Australia, thereby strengthening its global footprints.

Decent FY20 Results: During the period, the company reported operating revenues amounting to $542.6 million, up 7% on a year over year basis, supported by growth in core markets and positive contribution from OneVue and QuantHouse acquisition. The company’s segment profit on a reported basis stood at $152.9 million, up 1% year over year. Reported NPAT for the period amounted to $59.1 million as compared to $65.1 million reported in the year-ago period. The results highlighted the strength of the IRE business and the improving returns on its growth investments. The Board declared a final dividend of 30 cents per share, franked at 40%, bringing the full-year dividend to 46 cents per share (38% franked).

Revenues from APAC increased 10% on pcp in FY20, owing to acquisition synergies and higher demand for financial advice software, along with continued growth in Asia and continuing strength in Trading and Market Data. Financial Advice revenue grew 7% on pcp, whereas Superannuation revenue grew 12% in pcp in FY20. UK and Europe segment’s operating revenue increased 8% on pcp, depicting higher contribution from QuantHouse and O&M acquisition. Revenues from North America increased 16% on pcp, owing to synergies from buyouts and robust client retention. However, revenues from South America decreased 11% year over year, owing to political and economic tension and COVID-19 led virus outbreak.

FY20 Financial Highlights (Source: Company Reports)

Key Metrics, Balance Sheet and Decent Liquidity: The company has built a decent balance sheet position with net assets increasing to $587.86 million as at 31 December 2020. IRE has cash and cash equivalents of $63.1 million at the end of FY20. Total debt at the end of the period amounted to ~$272.9 million. The company’s cash conversion stands at 108%. Net cash flow from operating activities increased to $124.87 million in FY20, up from $102.61 million in FY19. The company’s healthy balance sheet and skilled management team along with its long-term nature of customer relationships, place IRE for considerable long-term growth. Free cash flow amounted to $114 million in FY20, enabling the company to continue to invest in growth, scale, and new product development.

During FY20, the company had a gross margin and EBITDA margin of 91.1% and 24.9%, higher than the industry median of 80.8% and 23.8%, respectively. The company reported a negative cycle of 23 days. Debt to Equity multiple of the company stood at 0.46x in FY20, lower than FY19 figure of 0.65x.

Growth and Leverage Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group 

Key Update: Recently, the company declared a dividend of AUD 0.30, with an ex-date of February 24, 2021 and a payment date of March 19, 2021.

Top 10 Shareholders: The top 10 shareholders together form around 40.98% of the total shareholdings, while the top 4 constitutes the maximum holding. Challenger Managed Investments Ltd. is the entity, holding maximum shares in the company at 9.15%. Greencape Capital Pty. Ltd. is the second-largest shareholder, with a holding of 8.28%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group  

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. Moreover, high debt, stiff competition in the markets where IRE operates and regulatory concerns may hamper the financial performance. Also, the company’s financial performance can be battered by increasing headcounts and personnel costs. This, in turn, may weigh on margin expansion, going forward. Also, rising expenses add to the woes.

Outlook: Looking ahead, the company has a well-established foundation in place for future growth. The company 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 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 company has a strong business with high levels of recurring revenue and cash conversion. We believe that with the robust segmental growth and geographical expansion, IRE looks poised to continue its expansion in FY21. For FY21, the company predicts to deliver Segment Profit in the ambit of $164 million and $168 million on a constant currency basis, including OneVue. NPAT on a reported basis is expected to be in the range of $56 million to $63 million for FY21. The company remains optimistic regarding its organic growth and increasing returns on growth investments, bolstered by more than 90% levels of recurring revenue.

Outlook (Source: Company Reports) 

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

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last three months, the stock went down by ~9.6% and went down 4.7% in the past six months. The stock made a 52-week low and high of $8.9 and $12.01, respectively. On the technical analysis front, the stock has a support level of ~$8.974 and a resistance level of ~$10.168. We have valued the stock using the P/E multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company might trade at a slight discount to its peer median, lower revenues from South America, political and economic tension, and COVID-19 led outbreak, and a leveraged balance sheet. We have taken peers like Altium Ltd (ASX: ALU), TechnologyOne Ltd (ASX: TNE), to name a few. Considering the above factors, decent top-line performance, enhancing shareholders’ value, decent cash position, synergies from acquisitions, increase in operating cash flow, and positive long-term outlook, we give a “Buy” recommendation on the stock at the current market price of $9.41, up by 0.426% on 9 April 2021.  

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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