Company Overview: A technology-based company, Infomedia Limited (ASX: IFM) is involved in the development and supply of Software as a Service (SaaS) offerings. The company's operating segments are in the Asia Pacific region, EMEA and the Americas. The company offers numerous solutions, such as Parts and Service, Data Management and Future Motors, to name a few.

IFM Details

Robust SaaS Offerings & Decent Liquidity Position Aid IFM: Infomedia Limited (ASX: IFM) develops, designs and supplies Software-as-a-Service & provision of data analytics solutions to the parts and service sector of the automotive industry. The company remains on track to enhance its customer relationship, given its continuous investments in the products and regions. During the wake of a global pandemic led by COVID-19 outbreak, digital transformation is crucial for businesses to gain a competitive edge against the peers and continue its growth prospects in the future. Given the current situation, companies with significant exposure to digital transformative technology are poised to continue its growth momentum in 2021 and beyond.

Digital solutions have been a hot pick amongst the customers, and IFM stands to gain from this opportunity given its integrated SaaS platform. In November last year, the company entered into a strategic pan-European agreement with Ford Europe to deliver the next generation of its Microcat electronic parts catalogue (EPC) in the region. The move marks a significant milestone for IFM, aiding it to deliver on the strategic objectives set for its business growth. Notably, the company has been investing in its worldwide platform to safeguard the architecture, system, and resources. The contract with Ford Europe depicts the company’s ability to leverage on the substantial change affecting the global automotive industry with pioneering technology solutions.

Apart from the contract win with Ford Europe, the company also won several other contracts and expanded its addressable market. This, in turn, positions the company to take advantage of its existing assets through new and existing customers, and entry into new markets. The company remains focused on its core growth strategy, both organically and through mergers and acquisitions. Markedly, it has a track record of consistent growth in revenue, profitability and returns to shareholders. It reported a CAGR of 10.5% and 1.4% in revenue and NPAT, respectively, over the period of 1HFY18-1HFY21.

Key Revenue Trend (Source: Company Reports)

1HFY21 Key Highlights: In 1HFY21, IFM’s net profit after tax (NPAT) surged 3% year on year to $9.33 million. The group’s revenue was almost flat year over year to $47.69 million. During the period, the company continued to invest in both the platform and additional functionality in its core parts and service products. In 1HFY21, more than 95% of revenues were recurring in nature. EBITDA for the period decreased 2% year over year and came in at $22.37 million. Cash EBITDA went down by 16% from the prior corresponding period, owing to higher investment in growth plan and successful introduction of Next Gen SaaS platform. On the back of continuous investment in business development, IFM remains on growth impetus.  During the period, the company declared an interim dividend of 2.15 cents.

Revenues from Products & Geographical Highlights: As per the regional performance, America’s segment reported revenue decline of 6% on local currency terms while Asia pacific segment’s revenue enhanced 8% year over year. EMEA segment’s revenue remained flat year over year on local currency basis. Product-wise, the company generated $26.74 million from parts products, which decreased 6% year over year. Service revenues went up 9% year over year and came in at $19.78 million.

1HFY21 Key Numbers (Source: Company Reports) 

Key Metrics and Decent Liquidity Position: The group has also built a decent balance sheet position with net current assets reaching $94.1 million as at 31 December 2020. IFM has a cash and cash equivalents of $97.3 million. The company remained on track to invest in the Next Gen SaaS platform. Net cash from operating activities came in at $17.03 million in 1HFY21, depicting a rise of 19% year over year, owing to improved collections and customer loyalty across global.

In 1HFY21, the company had an asset to equity ratio of 1.22x as compared to the industry median of 1.50x. Debt to equity multiple for the same time span stood at 0.03x, lower than the industry median of 0.07x. In 1HFY21, the company recorded cash cycle days of 40.3, lower than 2HFY20 cash cycle days of 41.5. EBITDA Margin in 1HFY21 stood at 44.3%, higher than the industry median of 20.8%.

Leverage and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Update: On 22 March 2021, the company informed the market that its non-executive Director Paul Brandling has revealed its plan to retire from its post, effective from 31 May 2021.

Top 10 Shareholders: The top 10 shareholders together form around 51.97% of the total shareholdings, while the top 4 constitutes the maximum holding. Viburnum Funds Pty Ltd held the maximum number of shares with a percentage holding of 12%, followed by Selector Funds Management Limited holding 7.94%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Risks: On the flip side, rising costs, and changing consumer spending habits may weigh on the financial performance, going forward. The company is also a part of a highly regulated industry. While rules and regulations are necessary, they might have a denting effect on the company’s agility, innovativeness, and ability to compete efficiently. The company operates in a highly competitive environment. Thus, entrants or existing competitors who deliver superior solutions and customer experience, remain a potential headwind. Further, loss of any key license agreements, loss of key customers, COVID-19 led disruptions and foreign currency fluctuation risks add to the woes.

Future Expectation: The group’s core areas include SaaS business model. The growth potential foreseen in the group’s business is enabling it to invest in infrastructure and resources to build a larger and more resilient organisation.  The company remains well focused to pursue strategic acquisitions, invest in core products, implement delayed rollouts, and continue its current growth trajectory and leverage on growth opportunities from the emerging automotive industry, through its strong execution. In 2HFY21, the company expects slight organic growth. In the medium term, the company expects to return to consistent, and sustained growth, on the back of its recent planned contract wins across all regions. This, in turn, has compelled the company to target double revenue growth to $200 million by 2025.

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: Over the last three months, the stock went down by ~14.05% but went up ~4% in the last one month. The stock made a 52-week low and high of $1.295 and $2.023, respectively. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer average, considering lockdowns due to COVID-19 led outbreak, travel restrictions, foreign currency fluctuation and changes in consumer spending and consumer preferences. For the said purpose, we have considered Appen Ltd (ASX: APX), ELMO Software Ltd (ASX: ELO), etc., as peers. Considering the current trading levels, strong liquidity position, higher net profit after tax in 1HFY21, and an encouraging long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $1.575, up by ~2.174% on 30 April 2021.

IFM 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.

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