Stock of the Day - IRE (EXPENSIVE)
IRESS Limited (IRE), which has been doing well in terms of diversifying earnings with scale positions, has reported a 61% increase in total group revenues for the six months ended 30 June 2014 to $170.2m. Segment profits increased by 45.0% to $59.3m while the reported profit after tax was $30.1m which increased by 69.1% from the prior half year. Basic earnings per share accounted for 18.95 cents per share, i.e., an increase by 37.1%. An interim dividend of 16.0 cents per share, franked to 40% has been determined to be paid.
IRE has illustrated robust performance in Australasia. The Company’s results included the contribution from UK. IRE has been able to explore broader growth opportunities through the regional UK/EU platform.
Primarily, the Company witnessed full period contribution of UK acquisition because of which the group revenue increased by 17.2% on 2H13 and group segment profit went up by 25.6% on 2H13. Australasian revenue was up 1.7% on 2H13 and segment profit went up by 2.0% on 2H13.
Operating Revenue (Source – Company Reports)
An overview of the profit emanating from IRE’s segments exemplifies that scaled Australasian position continued to present opportunities for integrated product suite; wealth management illustrated leveraged growth; and AUD cost allocations affected comparable margins in Canada and South Africa.
Segment Profit (Source – Company Reports)
For Australian and New Zealand (ANZ) financial markets, revenue profile reflected resilient result with revenue up by 0.6% and segment profit down by 3.5%. Broker cost focus continued while there were regulatory burdens.
ANZ – Financial Markets (Source – Company Reports)
With respect to ongoing investment, support and resilience, the Company mentioned about increase in subscriptions of IOS+ OTW against ASX BEST. IRE is also offering comprehensive international market data content including global company financials and broker consensus estimates. There is a strong demand for IPS for international portfolio management across institutional and retail. The Company is also making progress with respect to its next generation IRESS Trader solution. Even mobile product suite (iOS, Android) is now available freely to all professional IRESS users.
With respect to ANZ Wealth Management, integrated functionality and modular flexibility continue to position XPLAN as the most inclusive advice platform with a revenue increase of 3.5% and segment profit of 11.7%. New institutional rollouts are underway over the next 12-24 months. For this segment, the regulatory and public focus is bettering while there is an increase in scaled and automated advice demand. IRE is doing well with regards to its XPLAN-as-Platform and next-gen scaled user interface. In fact, XPLAN has been rated as leading advice platform and specialist risk software. The Company is expected to have solid revenue growth in view of the pipeline demand.
Operating Costs (Source – Company Reports)
For South Africa, the revenue increased by 6.5% with gross profit increase of 7.4% and segment profit rise of 0.1%. However, IRE reported that AUD result was affected by 7.0% adverse currency movement.
For Canada, cost control initiatives led to a revenue drop of 2.2% while segment profit rise was of the order of 3.3%. However, regulatory and marketplace changes are leading to an increase in industry costs and complexity. Certain positives include successful end-end real-time PWM implementation in place with first Canadian custodian, positive PWM pipeline, episodic advances in Canadian equity market conditions and the like.
For United Kingdom, differentiating competitive attributes such as technology, scale, positive response from client base, efficiency improvement via PWM, leading role in UK lending market, and other factors add to IRE’s benefit. For instance, Mortgage Sales & Originations (MSO) is an end-to-end, multi-channel mortgage platform for lenders. Similarly, IRESS Trigold mortgage sourcing is used by 15,000+ intermediaries. In UK, the Wealth Management segment also witnessed a revenue of £20.4m (90% recurring) from £13.4m in 2H13 with segment profit of £4.4m from £1.7m in 2H13. UK Enterprise Lending results included revenue of £12.0m and segment profit of £3.4m. Although, certain client decisions affected the financial outcomes due to postponing of projects, the Company is managing the same through strategic initiatives and new opportunities. The Company nonetheless, does not expect a significant contribution from second half.
With regards to UK Financial Markets, the Company has demonstrated differentiated product capabilities and high levels of support in a competitive scenario. For instance, PWM is regionally differentiated and well positioned to respond to significant market need.
Resilient & Diversifying Attribute (Source – Company Reports)
For SE Asia segment, the Company has established leading online CFD trading platform in Singapore. Then, vendors in Singapore and Malaysia are benefitting from IRE’s integrated core trading and market data desktops. There is also enhanced interest in technology solutions from private banking service offerings in Asia.
IRESS Daily Chart (Source - Thomson Reuters)
As per the Company’s outlook, the Company expects positive trading into 2H14 with software implementation projects in retail segments in all regions. The Company’s strong growth in Australian Wealth Management and full year contribution of UK acquisition appear to be some brownie points. IRE’s Enterprise business has high potential but it is difficult to predict with contribution between halves expected to be raucous. Contribution in the second half is not expected to be significant. Accordingly, we believe that the stock is
EXPENSIVE at the current price of $10.20.
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