Integrated Research Limited

IRI Details

AGM Update: Integrated Research Limited (ASX: IRI) offers performance monitoring and management software solutions for unified communications, payment networks, and business computing environments.

• IRI reported ~$18.5 million positive free cash flows (FCF) and ~100% cash collection conversion rate for FY22 on a year-to-date basis.
• The company highlighted an update on the key performance indicators (KPIs) set for FY22. IRI remains on track regarding its customer retention rate of ~95%. Its proforma subscription and revenue retention is ahead of plan at ~92%. The company is advancing well on extending its third-party partnerships and new customer acquisitions.
• The company reported that its year-to-date TCV (total contract value) has grown on a pcp basis, due to early traction witnessed for new products licensed for hybrid solutions.

Reduction in Total Expenses; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of higher development costs and technology obsoletion. Regulatory changes and expansion to new markets also pose a challenge to business growth.  

Outlook:

• IRI launched new SaaS products in FY21 and foresees the opportunity to cross-sell and up-sell these new products to its current customers and net new customers in FY22.
• The company is actively pursuing collaborations to expand its total addressable market (~$1.2 billion + growing TAM) to fulfil the changing business needs towards hybrid environments.
• IRI is on the path of implementing its plan to transition the business to SaaS subscription revenues. In FY22, it plans to expand and support its changing business model, the share of subscription revenues, and use TCV and free cash lows as the key operating metrics.

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

Source: 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 ~31.68% in the past three months and a negative return of ~40.35% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $1.135 - $3.100. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average P/E multiple, considering the uncertainty of time in the recognition of revenue from SaaS contracts, changing client needs, and structural changes in the industry, etc. For this purpose of valuation, a few peers like Infomedia Limited (ASX: IFM), Iress Limited (ASX: IRE), Nuix Limited (ASX: NXL) have been considered. Considering the current trading levels, customer growth and retention, diversification towards a new revenue model, the launch of new products, plans for continued investment in products and platform, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $1.175, down by ~1.261% as of 22 December 2021.

IRI Daily Technical Chart, Data Source: REFINITIV  

Tesserent Limited

TNT Details

Partnership with Vocus: Tesserent Limited (ASX: TNT) provides networking and cyber security solutions to mid-market, corporate, critical infrastructure, and government clients. It operates Pure Security Group, North, and IT Security Managed Services as its core segments. On 21 December 2021, TNT declared entering a partnership with Vocus. As per a newly signed master reseller agreement, TNT will provide its Cyber 360 solutions to Vocus’ 5,000 plus- government and enterprise clients. The management believes this alliance will improve TNT’s profitable organic growth and access to new clients.  

Conversion of Options: On 10 December 2021, Director, Gregory David Baxter disposed of ~1.5 million options and acquired ~1.5 million ordinary shares in the company. He held ~5.40 million ordinary shares and 3.00 million unlisted options in TNT.

Financial & Market Update:

• The company has registered considerable organic and inorganic growth in the last two years. In FY21, the turnover increased by ~372% YoY. The ARR (annual recurring revenue) stands at ~42% as of 19 November 2021 versus ~30% at the close of CY2020. TNT reported organic growth of ~41% in its underlying business units for the first four months ended October 2021 (on a year-to-date basis).
• TNT has closed multiple strategic acquisitions (Seer & Ludus, Airloom Holdings, Loop Secure, etc.) recently to grow rapidly and meet its short-term goals.
• The company has implemented organisational changes at the Board level to manage the rapid expansion and growth. It plans to align these changes with its new go-to-market strategy.
• TNT held $19.8 million cash and had ~$15.2 million net debt as of 15 November 2021.

The trend of Earnings from FY15-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces cyber security threats, technological changes, regulatory hurdles, and the risk of synergies from multiple recent acquisitions.

Outlook:

• TNT plans to hold investor roadshows during December 2021 and provide further market updates.
• The company has set a target of achieving ~$200 million of turnover, ~15% of operating EBITDA margin, and growth in ARR to ~50% in the short-term.
• The company aims to drive cross-selling and deeper customer engagements, growth in the average number of services per customer, and optimisation of efficiencies via integration with the recently acquired firms.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: 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 TNT gave a negative return of ~30.43% in the past three months and a negative return of ~38.46% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.150 - $0.440. The stock has been valued using the Enterprise Value to Sales based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ median EV/Sales multiple, considering the continuing trend of negative margin, negative ROE, risk of acquisition synergies, and forex rate fluctuations. For this purpose of valuation, few peers like Integrated Research Limited (ASX: IRI), Adacel Technologies Limited (ASX: ADA), Reckon Limited (ASX: RKN), and others have been considered. Considering the current trading levels, expanded client base with recent partnership and acquisitions, growth in ARR and turnover, indicative upside in the valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.160, down by ~3.031% as of 22 December 2021.

TNT Daily Technical Chart, Data Source: REFINITIV  

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: 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.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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