Integrated Research Limited

IRI Details

New Appointment to the Board: Integrated Research Limited (ASX: IRI) is a provider of varied software solutions such as collection and storage of data, performance tracking, event automation, helpdesk applications, resource management and job scheduling. As of 19 May 2021, the market capitalisation of IRI stood at ~$378.87 million. On 13 May 2021, IRI announced the appointment of Mr James Scott as a Non-Executive Independent Director to the Board.

1HFY21 Results: IRI reported 1HFY21 revenue of $34.1 million, down by 36% YoY, due to lower revenues generated from its collaboration and infrastructure businesses. It reported an NPAT of $129,000, down by 99% YoY. The company added 16 new customers, including FedEx, during the quarter. IRI reduced its operating cost base to $32.9 million, down by 15% YoY. During Q1FY21, IRI introduced new cloud solutions for Zoom and Microsoft Teams and expanded its Collaborate product line. During 1HFY21, IRI invested $10.1 million in R&D (~30% of its revenue). The operating cash flows stood at $11.3 million and cash receipts amounted to $42.4 million for 1HFY21. IRI paid a fully franked final dividend of 3.75 cents per share in October 2020. The company did not declare a dividend for 1HFY21 and will assess future dividend payments after the availability of FY21 results. IRI held a cash reserve of $8.2 million as of 31 December 2020.

1HFY21 P&L Highlights (Source: Company Reports)

Key Risks: The company faces business uncertainty due to COVID-19 and other global tensions, lengthening regular sales cycles, and deferred customer purchases. It also bears the risk of foreign exchange impact on the AUD dollar.

Outlook: IRI has laid plans to turn around its 1HFY21 performance. However, the company estimates FY21 revenue and profit will remain below last year figures. IRI aims to seek traction from new cloud solutions recently introduced to bolster the platform growth in future. The company plans to introduce real-time payment monitoring in Q4FY21 to cater to banks. IRI anticipates 100 renewals and capacity deals in 2HFY21 and 20 plus strategic customers on its SaaS platform. It plans to expand Collaborate line further with the release of new solutions for Webex in Q4FY21.  

Valuation Methodology: EV/Sales 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: The stock of IRI gave a negative return of 12.25% in the past three months and a negative return of 37.11% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level of $2.050-$4.920. The stock of IRI has a support level of ~$2.054 and a resistance level of ~$2.557. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount than its peer average, considering its lower revenue and NPAT for 1HFY21 vs 1HFY20, lower revenue forecast for FY21, and the risks associated with the longer sales cycles due to COVID-19 along with foreign exchange fluctuation risks. For this purpose, we have taken peers like TechnologyOne Limited (ASX: TNE), Infomedia Limited (ASX: IFM), Hansen Technologies Limited (ASX: HSN) and others. Considering the current trading levels, growth of customers in Q1FY21, product launch plans for FY21 and FY22, increase in SaaS customers and renewals targeted, valuation, and associated risks with delayed sales cycles and pandemic uncertainties, we give a ‘Speculative Buy’ rating on the stock at the current market price of $2.220, up by ~0.909% on 19 May 2021.

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

Netlinkz Limited

NET Details

Despatch of Prospectus & Entitlement Acceptance Forms: Netlinkz Limited (ASX: NET) is a cloud network solutions provider. NET offers Netlinkz VSN ‘Network as a Service’ as its main product for companies of all sizes. As of 19 May 2021, the market capitalisation of NET stood at ~$62.91 million. The company notified the market regarding the despatch of Entitlement Acceptance Forms and Prospectus to the Eligible Shareholders (Retail). It has provided a timetable for the key dates for the Rights Issue in the notice released today.

Simplification of Capital Structure: On 9 March 2021, NET announced to simplify the capital structure by decreasing the number of issued options after seeking shareholder approval. On 14 May 2021, it announced shareholders’ approval via its Notice of Meeting submitted to the ASX. NET is offering two alternatives to the option-holders. If the option holder chooses to cancel their right to their options, NET will issue fully paid ordinary share in the ratio of 0.0866 of one share for each option cancelled. Those option holders who do not wish to cancel their options will be issued options, subject to their approval.

Trading Halt & Completion of Institutional Entitlement Offer: The company requested to place its shares in a trading halt on 11 May 2021, pending the completion of the institutional entitlement offer. The trading halt was lifted on 13 May 2021 when NET notified the investors of the completion of the Institutional Entitlement Offer, fully underwritten. It is a non-renounceable pro-rata offer of 1 new fully paid ordinary share for every 4.2 fully paid ordinary share owned. The shares will be issued to the Eligible Shareholders as of the Record Date (13 May 2021). The offer was fully subscribed, and NET raised ~$1.7 million. The company is expected to allot 69 million new shares at $0.025 per share on 21 May 2021, and shares will start trading on ASX from the same date. The offer price reflects a 13.8% discount on the last closing price on 10 May 2021. The new shares will rank identically with the existing shares on issue in all respects.

Retail Entitlement Offer: NET expects to raise ~$13.3 million via the retail offer. The retail offer is opened on 18 May and closes on 2 June 2021 (at 5 PM AEST). Retail shareholders as of 13 May 2021 (the Record Date) are eligible to invest in new shares at the offer price. The Prospectus was to be despatched to the eligible retail shareholders on 18 May 2021. New shares will be issued under Retail Entitlement Offer on 9 June 2021 and expected to commence trading from 11 June 2021 on ASX. Eligible shareholders who take up their Entitlements in total are also invited to apply for additional (new) shares in the oversubscription facility. Issuance of additional new shares is discretionary. Since the Entitlement Offer is non-renounceable, shareholders’ Entitlements will not be tradeable on ASX or elsewhere. The eligible shareholders who do not wish to take up full Entitlement will get shares for those Entitlements accepted and will decrease their percentage shareholding in NET.

Purpose of Entitlement Offer: NET plans to raise ~$15.5 million (before costs) for investing in China, meet working capital needs, repay outstanding convertible notes and its short-term loan, bear sales costs in North America, Europe and other locations and meet its offer costs.

Substantial Shareholder: On 10 May 2021, NET announced that ARIE Manager Pty Limited held 44.08 million shares in NET as the trustee for SCM ARIE (Absolute Return International Equity Fund). ARIE also owns 233.83 million ordinary shares in NET via CGS CIMB Securities. CGS-CIMB Securities (Singapore) Pte. Limited is a substantial shareholder in NET. It is also the custodian of the securities on behalf of the SCM Absolute Return International Equity Fund (ARIE). Hence, ARIE’s total interest in NET is 11.17% of shares (or 277.91 million shares) on the issue.

March Quarter (Q3FY21) Results: The company reported an increase in revenue to $2.9 million in Q3FY21 versus $1.6 million in Q3FY20. The Group revenues increased by 423% YoY for YTD21. It entered a binding contract with Uni Systems Information Technology to provide network solutions to European companies. It inked a distribution agreement with Frame Communications in the UK. Asian revenues lead growth, with revenue from China up by 89% on pcp. In March 2021, NET had announced to simplify the capital structure and decided to cancel up to 249 million options and rights to options for consideration. It has now despatched the offer to option holders/right to option holders and implement it subject to shareholders approval in their meeting in May 2021. NET held a cash balance of $3.1 million as of 31 March 2021.

FY21 vs FY20 Revenue Highlights (Source: Company Reports)

Key Risks: The company is exposed to foreign exchange fluctuation risks as it undertakes certain transactions in foreign-denominated currency. It also faces the threat of pandemic uncertainties and potential disruption in client networks. 

Outlook: Owing to the seasonality of revenue, NET expects a stronger Q4FY21 and proportion of recurring revenue to grow. NET expects an increase in recurring revenue by ~50% in the next three years owing to its steady client base and global diversification. It anticipates quarterly revenue split will be more consistent.

Stock Recommendation: The stock of NET gave a negative return of 44.17% in the past three months and a negative return of 63.83% in the past six months. The stock is currently trading towards its 52-weeks’ low level of $0.024. The stock of NET has a support level of ~$0.019 and a resistance level of ~$0.041. On a TTM basis, the stock of NET is trading at a price to book value multiple of 6.3x, lower than the industry (Technology) median 7.8x, thus seems undervalued. Considering the current trading levels, increase in top-line for Q3FY21 and YTD21, new agreements signed in Q3FY21, higher revenue expectations for Q4FY21, valuation on a TTM basis and key risks associated with the business, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.025 on 19 May 2021.

NET 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.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.