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Stock Of The Day - IRESS (EXPENSIVE)

Iress Ltd is an Australian technology company which focuses on providing software and services to financial market professionals in several countries such as Australia, New Zealand, the United Kingdom, Canada and South Africa. The company occupies a prominent position in the Australian market in areas such as market data, trade routing and order management and this position has generated a network effect which has been boosted by their success in integrating their software into clients' systems. There is limited scope for organic growth in its legacy financial markets, the business is mature and generates steady and reliable cash flows.


Results for the year to 31 December, 2014
 
The highlights for the year included a 31.3% growth in group revenue to $ 329 million and a 26.4% growth in group segment profit to $ 111.4 million. Following the successful acquisition of Avelo, the UK presence has been strengthened and the continuing diversification means that 45% of revenues generated outside Australia in 2014 compared to 32% in 2013. The reported group profit at $ 50.67 million was 109% higher than the previous year and the final dividend of 25.5 cents per share which is 40% franked was up 9.2% over the previous year.


 Global Reach (Source - Company Reports)

CEO Andrew Walsh said that the full-year results reflect the long-term focus of the company in delivering reliable and differentiated solutions to its clients and on diversification and generating economies of scale. The company is anticipating and changing in response to changes in market while becoming more international in scope of operations. These results are the first full-year results after the successful acquisition of Avelo and the strong position established in the UK is helping to generate both opportunity and diversification. The results were helped by the full-year contribution from the UK (four months in the previous year) and have resulted in the growth in operating revenues and segment profits.


Operating Revenue + Segment Profit (Source - company Reports)
 
In global terms, the wealth management business continues to experience robust demand and growth and, in spite of the ongoing pressures on the equity broking market, the financial markets results continue to be positive. The Enterprise Lending business has been repositioned in the UK and, from being services-based, is substantially being transformed into a flexible core product. Over time, this will result in less volatile revenue streams and customers will benefit from greater efficiency and lower ownership costs. The Australasian business is well positioned for the future having achieved a growth in segment profits of 5.2%.


Operating Revenue (Source - Company Reports) 

The balance sheet continues to be strong with total current assets at $ 109.5 million almost the same level as the end of the previous year and cash assets account for $ 74.9 million of this total. Total current liabilities have shown a reduction to $ 34.8 million from $ 52.6 million in the previous year. Total non-current assets have declined slightly to $ 464.4 million from $ 476.5 million in the previous year and as before, the lion's share is goodwill at $ 398.5 million. Finally, total non-current liabilities have remained about the same level at $ 208.2 million with $ 179.1 million in borrowings and $ 12.9 million in derivatives liabilities.


Outlook for 2015 
 
Trading in the early part of 2015 has been in line with the average for the second half of 2014. Sell side pressure can be expected in the short term because the strategic initiatives undertaken by customers need to be balanced against the pressure from regulators. Efforts at implementation and support for clients continue to form the basis of recurring revenue and growth over time and investment expenditures in the expectation of future revenue continue to be managed and implemented carefully. Additional investments in products and businesses will continue to be made in anticipation of the requirements of customers and what is needed to grow revenues. The company expects the additional investment in 2015 relating to the development of new products and capabilities will be in the range of 2% to 3% of segment profits. Results for the Enterprise Lending business should not be predicted on the basis of a single half year and contribution in 2015 is expected to exceed the levels of 2014 though some variation may take place. On the basis of constant foreign exchange rates, the company expects segment profit growth to be around 3.5% in 2015.


 Strategic Charges (Source - Company Reports)

The company' s platform for advice and wealth management XPLAN has been nominated as the leading Australian financial planning application for the eighth consecutive year by the research house Investment Trends. It cited the application as "an outstanding example of Australian software engineering". It achieved the highest ever score of 94% and was the leader in five categories such as client and portfolio management. The report notes that the application has seen more improvements than all the other participants combined and was rated the first for overall functionality.
 

Daily Chart Iress (Source - Company Reports)

Despite the undoubted technical prowess, we would have to regard this company has a little bit of a mixed bag. It does have its positives such as the dominant position in the Australian financial software market where its products are extremely popular and competitors will find it difficult to challenge this position. This business makes up around 33% of the company's revenues but has little to offer by way of growth. The wealth management industry in Australia is growing strongly because of management of superannuation assets and the revenue in this segment in 2014 grew by 13%. However the comparative maturity of the Australian market is made up by the International diversification in other countries. On the negative side, we're not supporters of growth primarily by acquisition and in this case, acquisition seems to have resulted in an increase in net debt and declines in EPS and return on equity. The share price has gained some 27% over the past year and we believe that the stock is now expensive in relation to its valuation.