1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Technology||52-Week Range: A$9.17 – $14.20|
|Industry: Information Services||Market Cap: A$2,336.5m|
We rate IRE as a Neutral for the following reasons:
- We have no doubt that IRE is a quality company with strong management team however in our view, much of the upside is captured in its share price and trading multiples and hence IRE is trading range bound.
- ASX also retains its 18.6% stake.
- Growing quantum of superannuation/pension bodes well for IRE’s clients, which bodes well for demand for IRE’s products.
- IRE’s products are firmly entrenched within Australia, UK and South African financial market players (i.e. IRESS terminals and XPLAN). For instance, in ANZ Wealth Management segment, increasing dynamic of self-licensing by practices, high client retention and increasing demand for integrated solution, are all key revenue themes. Over 90% of revenue is recurring.
- Strong continuing momentum in the core growth markets of ANZ Wealth Management, and South Africa and the UK.
- New product roll-out providing growth opportunities.
- Solid balance sheet and capable management team.
We see the following key risks to our investment thesis:
- Less subscription due to declining sell-side and buy-side demand as well as financial planners.
- Competitive platforms/offering (new disruptive technology); improved features and innovation from competition.
- Associated risks in relation to system, technology and software.
- Regulatory and structural changes in the finance sector impacting clients and their needs.
- Deterioration in equity and debt markets which may have a negative impact on terminal demand.
- Further deterioration with its Canadian segment.
Figure 1: IRE Revenue by Segment
IRE reported as expected 1H18 results where management reaffirmed FY18 guidance.
On the analyst call, management noted “revenue growth was led by a strong contribution by wealth management and lending, while [a] focus on operating efficiencies resulted in flat cost growth and margin expansion… segment profit margin in the first half was 29.4% compared to 28.1% pcp”. Other key highlights include:
1. Group revenue of $229.7m was +8% higher on 1H17 and +5% on 2H17 (+6% and +3% respectively, on constant currency basis).
2. Reported NPAT of $32.0m, +8% on 1H17 and +6% on 2H17.
3. Group Segment Profit of $67.5 m, +13% on 1H17 and +3% on 2H17 (+11% and flat respectively, on a constant currency basis).
4. IRE maintained strong cash conversion of 99%, recurring revenue ~90%, leverage ratio of 1.4x segment profit.
On the analyst call, FY18 reaffirmed guidance stating “2018 Segment Profit growth expected to be in the range of 3-7% on a constant 2017 currency basis…If average first half FX rates continue for the remainder of the year, reported Segment Profit for 2018 will be in the range of $131m – $136m representing growth of 5-9% from reported Segment Profit in 2017”.
Indeed, on the analyst call, management stated “…firstly, we do continue to closely watch regulatory and market structure developments in Australia and are well positioned, and we are assisting clients to respond and adapt to a changing environment. Secondly, earnings momentum in the UK is expected to increase in the second half, with client projects underway and a good pipeline of opportunities ahead.
Finally, we reaffirm the guidance provided in February”. On our conservative numbers, IRE trades on 29.2x PE20, 3.3% dividend yield. We have no doubt that IRE is a quality company with strong management team however in our view, much of the upside is captured in its share price and trading multiples and hence IRE is trading range bound. Neutral.
- APAC Financial Markets (~25% of revenue). Revenue of A$56.9m (direct contribution of A$40.8m) were marginally lower on pcp driven by buy-side demand for IRE’s portfolio solution, offset by continued headwinds in sell-side. According to management, deployment of online trading solution in Singapore is providing further opportunities in Asia.
- ANZ Wealth Management (~29% of revenue). Revenue of $67.0m and direct contribution of $49.5m were +9% and +8% higher respectively on pcp driven by organic revenue growth from increased number of users of CRM, portfolio and financial modelling tools.
- United Kingdom (~25% of revenue). Revenue of £32.4m and direct contribution of £20.7m were +6% higher on pcp driven by momentum in IRE’s simplified XPLAN offering for small and medium businesses. According to management “revenue growth rate in the second half is expected to increase reflecting client projects already underway”. Management noted “we’ve had significant client activity in the first half, although reported revenue growth does not fully reflect the first half’s activity. Revenue momentum is expected to increase in the second half”.
- South Africa (~10% of revenue). Revenue and direct contribution were +4% and +3% respectively on pcp (local currency) despite decline in standalone market-data terminals and revenue being impacted by the delay in planned changes to trading and settlement infrastructure at the JSE (Johannesburg Stock Exchange). According to management on the analyst call, “this is expected to push some revenue growth into 2019”. Interestingly, IRE secured a new contract to deploy a wealth and trading solution to a tier one financial services business, which bodes well for earnings. Management expects “revenue in the second half to be flat on the first half”.
- Lending (~7% of revenue). Revenue of £8.4m increased +32% on pcp due to a “implementation activity driving earnings growth and margin expansion”. Direct contribution of £6.8m was 39% higher on pcp as IRE transitions to a subscription model with recurring revenue increasing to ~20% of total revenue (versus ~15% in 2017).
- Canada (~4% of revenue). Revenue and direct contribution were +3% and +10% on pcp (local currency) driven by “successful wealth deployments to a number of new clients with a good pipeline”.
IRE FY18 RESULTS SUMMARY
Figure 2: IRE 1H18 Group Results
Figure 3: IRE 1H18 Segment Results (in constant currency)
Figure 4: IRE Financial Summary
Source: Company, BTIG, Bloomberg
IRESS Ltd (IRE) is an ASX-listed company that specialise in software for the finance industry, with a focus on financial markets, wealth management and superannuation. IRE operates in the Asia-Pacific, UK, South Africa and Canada.