Company Overview: Iress Limited (ASX: IRE) offers information, trading, compliance, portfolio management, order management, wealth management, and related tools. The company has its business operations across Asia-Pacific, Australia, North America, Africa, and the UK & Europe. The company was listed on ASX in 2000, and its software is utilised by more than 500,000 users worldwide.

IRE Details

Key Strategies, Historical Overview & AGM highlights: The company has a history of delivering sustainable returns to its shareholders, depicting a strong track record of revenue and earnings growth.

• Over a period of 2017 to 2021, the company has reported a top-line and bottom-line CAGR of 8.5% and 5.4%, respectively.
• The company remains on track to leverage the cloud infrastructure on the back of higher demand from its clients. The company has started the transition to the new single technology platform and operating model. With the new platform, it will be able to launch new products to market faster, thus generating additional revenue growth and drive further operating leverage.

Key Strategical Overview; Analysis by Kalkine Group

Spotlight on FY21 Results:

• Robust Top and Bottom-Line Performance: During the period, the company reported operating revenues amounting to $595.9 million, up 10% on a year over year basis, supported by growth in core markets and positive contribution from OneVue integration and O&M acquisition. The company’s segment profit on a reported basis stood at $166.2 million, up ~9% year over year. Reported NPAT for the period amounted to ~$73.9 million, up 25% on a year over year basis, owing to acquisition synergies, revenue growth and cost control measures across the groups.
• Track Record of Dividends: The board declared a final dividend of 30 cents per share, franked at 15%, bringing the full-year dividend to 46 cents per share (38% franked). The company remains on track to maintain a pay-out ratio of a minimum of 80% of normalized NPAT on an annualised basis.
• Balance Sheet and Liquidity: The company has built a decent balance sheet position with a cash and cash equivalents increasing from $63.1 million at the end of FY20 to $64.39 million at the end of FY21. Total debt (including lease obligations) at the end of the period amounted to ~$389.3 million. Net cash flow from operating activities stood at $101.2 million in FY21. Free cash flow amounted to $76.2 million in FY21, enabling the company to continue to invest in growth, scale, and new product development.

Geographical Highlight; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported a gross margin of 91.1%, higher than the industry median figure of 83.8%. In FY21, the company recorded a current ratio of 1.37x compared to the FY20 figure of 1.29x.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 48.17% of the total shareholdings, while the top 4 constitute the maximum holding. Challenger Managed Investments Ltd. held the maximum number of shares with a percentage holding of 7.06%, followed by Greencape Capital Pty. Ltd. holding 6.94%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

Key Risks; Analysis by Kalkine Group  

Outlook: The company reaffirmed its view for FY22 and expects to deliver segment profit (including mortgages) in the ambit of $177 million and $183 million, with a 7-10% growth rate. NPAT on a reported basis is expected to be in the range of $63 million to $72 million for FY22. On an underlying basis, NPAT (including mortgages) is expected to be in the range of $74 million to $81 million for FY22, compared to $59 million in FY21. The company remains optimistic regarding its organic growth and increasing returns on growth investments. It also aims to more than double NPAT by 2025. The integration of OneVue and O&M will offer significant earnings upside potential and enhance shareholders’ value.

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 the company has been corrected by ~14.86% in the past six months. Currently, the stock is trading below the average of its 52-week high and low levels of $9.81 and $15.30, respectively. 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 as compared to its peers, considering a structural shift, stiff competition, high debt levels, COVID-19 led uncertainties, integration risks, etc. For the purpose of valuation, peers such as Altium Ltd (ASX: ALU), TechnologyOne Ltd (ASX: TNE), Appen Ltd (ASX: APX) and others have been considered. Considering the rise in top-line, positive outlook, enhancing shareholders’ value, robust customer base, product launches, current trading levels, and indicative upside in the valuation, we recommend a ‘Buy’ rating on the stock at the closing market price of $10.45, down by ~2.153% as on 6 May 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

IRE 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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