Iress Limited

Company Overview: Iress Limited (ASX: IRE) is engaged in providing information, trading, compliance, order management, portfolio and wealth management, and related tools. The company has its operations across Asia-Pacific, Australia, New Zealand, 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. The role of technology in financial services is increasingly important.

IRE Details

Synergies from Acquisition and Geographical Expansion Aids IRE: Iress Limited (ASX: IRE) is engaged in offering IT-based software solutions to the financial services industry and wealth managers. Key initiatives during FY19 included the introduction of IRESS automated super offering that helped the clients to grow their business by providing digital advice to their customers.The company’s IRESS Labs was moved from 10% of core products operating within the Labs framework to 77% of core products in 2019. The period was also marked by the acquisition of market data provider, QuantHouse, which offers more than 145 data feeds from exchanges and other data providers to clients globally. The acquisition expands IRE’s offering to clients globally. Several milestone projects were also implemented in FY19, including significant deliveries in the UK and Australia to large private wealth management and advice clients.

In FY19, the company reported revenues of $508.9 million, representing an increase of 10% on prior corresponding period. On a constant currency basis, revenue increased by 8%. The strong financial position depicts the continuous demand for the company’s software and services, as financial market participants worldwide are seeking expertise in transitioning to more cost-effective, data-driven ways of working. Revenue growth for the period also reflected a strong contribution from Australia and the United Kingdom, along with the QuantHouse acquisition.

The company also witnessed strong revenue growth in New Zealand & Asia. Further, the company’s private wealth software gained momentum on the back of two major retail firms selecting IRE in 2019. Moreover, the company saw a strong impetus in its superannuation business, with two noteworthy client wins for its super administration offer. In Asia, the company experienced robust revenue growth after the successful launch of Viewpoint, an online trading software, to two leading organisations. The composition of revenue based on the region came in as ~52% from APAC, ~34% from the United Kingdom and Europe, ~9% from South Africa and ~5% from North America. 

Over a period of 2015 to 2019, the company has reported top-line CAGR of 8.93% with revenue in 2015 and 2019, amounting to $361.5 million and $508.9 million, respectively. Net profit CAGR over FY15-FY19 was reported at 4.13% with 2015 and 2019 profits amounting to $55.4 million and $65.1 million, respectively. The company has a history of delivering sustained shareholder returns, depicting a strong track record of revenue and earnings growth.

Past Performance (Source: Company Reports)

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 has recently suspended its FY20 outlook due to the uncertainty in the market. 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. 

1HFY20 Financial Highlights: During the period, the company reported group revenue amounting to $270.7 million as compared to $241.8 million in 1HFY19. Revenue growth during the period was supported by growth in core markets and positive contribution from QuantHouse acquisition. On a reported basis, the company’s segment profit stood at $71.9 million, down 8% on prior corresponding period profit of $74.1 million. Reported NPAT for the period amounted to $26.3 million as compared to $30.4 million reported in the year-ago period. NPAT went up by 4%, excluding the impact of changes in accounting standards and QuantHouse acquisition. The Board declared an interim dividend of 16 cents per share, franked at 35%.

Financial Results (Source: Company Reports)

Segment-wise Results: Operating revenue from APAC stood at $142.3 million, up 11% on pcp. During the period, growth was driven by the demand for financial advice software and QuantHouse acquisition. Financial Advice & Superannuation revenue witnessed a rise of 15% year over year. UK & Europe segment’s reported operating revenue increased 16% year over year, on the back of ongoing delivery to key clients, continued solid growth in Sourcing and positive contribution from QuantHouse.

Mortgages revenue went down by 22% on pcp, with direct contribution declining 31% year over year.

South Africa segment’s reported operating revenue increased 2% on prior corresponding period. Direct contribution for the period went up 3% year over year. The company is progressing well on the deployment of private wealth software to a large financial services client. Operating revenue from North America segment increased a whopping 45% on prior corresponding period, while direct contribution increased 25% year over year.

Segment Highlights (Source: Company Reports)

Balance Sheet and Cash Flow Highlights: At the end of 30 June 2019, the company’s cash balance amounted to $100 million and net assets stood at $551.3 million. Net debt at the end of the period amounted to $48.7 million. Cash conversion during the period was elevated at 134%. Net cash provided from operating activities in 1HFY20 came in at $71.1 million. On 29 April 2020, the company refinanced its unsecured bank facilities totalling $300 million that were due to expire in November 2021. The amount of the unsecured bank facilities was increased to $405 million and the expiry date has extended to April 2024.

Cash Conversion (Source: Company Reports)

Acquisition of OneVue: Iress Limited had released an announcement regarding a proposal to acquire 100% of the outstanding shares of OneVue through a Scheme of Arrangement, offering to pay a consideration of 40 cents per share implying an equity value of around $107 million. OneVue Holdings’ Board has recommended the shareholders to vote in favour of the scheme, in the absence of any superior proposal and subject to an independent expert’s advice. OneVue’s position in the administration of funds, super and investments, and Iress’ software strength, will drive innovation and demonstrates an opportunity for the development of software and services that will offer significant earnings upside potential to deliver long-term shareholder value. The combination of OVH’s strength and position in the administration of managed funds, superannuation, and investments, with Iress’ strength in software and data, would drive innovation through technology. This transaction is subject to various approvals, and other regulatory approvals, and is expected to be finalised in October 2020. 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 52.1% of the total shareholding. Challenger Managed Investments Ltd. holds the maximum interest in the company at 8.04%, followed by Pinnacle Investment Management Group Ltd holding 7.3% of the shares.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: During FY19, the company had an EBITDA and gross margin of 26.8% and 91.6%, higher than the industry median of 25.9% and 81.1%, respectively. Operating margins margin for the period stood at 18.7%, higher than the industry median of 11.1%. ROE for FY19 stood at 15.2%, higher than the industry median of 6.5%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: 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.

What to Expect: The company remains on track to foresee and respond to the COVID-19 situation and remains focused on supporting the well-being and health of its people, service continuity to clients and users, and assistance to the community. The company is also taking necessary measures to include business-critical teams, in order to work remotely for an extended period of time. These initiatives will help the company to stay afloat during the time of COVID-19 crises and will help it to emerge stronger in the future. Further, the company’s effort to implement capital raising program will strengthen the balance sheet and provide flexibility to fund opportunities in the current environment. A part of the proceeds will also be utilised in paying for the acquisition of OneVue. We believe, with robust segmental growth and geographical expansion, IRE looks poised to continue its expansion in FY21.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters

Stock Recommendation: The stock of the company corrected 12.17% in the past one year but went up ~3.99% in the past one month. At the CMP of $10.24, the stock of the company has an annual dividend yield of 4.31% and P/E ratio of 30.34x. The company has a market capitalisation of ~$2.06 billion and ~193.24 million outstanding shares. Currently, the stock is trading below the average of 52-week trading range of $8.290-$14.36. On the technical analysis front, the stock has a support level of ~$10.152 and a resistance level of ~$11.416. Considering the recent developments, acquisition synergies and current trading levels, we have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of lower double-digit upside (in percentage terms). For the purpose, we have taken the peer group - Tyro Payments Ltd (ASX: TYR), EML Payments Ltd (ASX: EML), Bravura Solutions Ltd (ASX: BVS), to name few. Hence, we recommend a “Buy” rating on the stock at the current market price of $10.24, down ~4.12% on 4 September 2020. 

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

Disclaimer

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