EUR 850.00 For Business Accounts Only

Morningstar | Iress Demonstrates Good First-Half Cost Control; FVE Increased to AUD 11.00

Narrow-moat-rated Iress’ first-half financial result was stronger than we were expecting. However, the 15% subsequent share price jump looked disproportionate to the result, and we expect the general bullish sentiment towards technology stocks was the main reason for the share price rise. First-half group revenue growth of 8.4% versus the prior comparable period was stronger than our full-year growth forecast of 7.1%, but constant-currency growth was only 6.3%. Similarly, the contribution margin grew by 8.3%, ahead of our 7.0% forecast, but was just 6.5% on a constant-currency basis.

We have increased our fiscal 2019 EBITDA forecast by 5% to AUD 129 million to reflect the stronger-than-expected first-half revenue growth and lower-than-expected cost growth. This implies EBITDA growth of 11% versus the prior year, which exceeds management guidance. We’ve also adjusted longer-term forecasts, with EBITDA increasing by a similar amount in future years. Combined with a 2% boost from the time value of money, our fair value estimate has increased by 8% to AUD 11.00. However, at the current market price of AUD 13.46, we still believe the shares are overvalued. The market price and our forecasts imply a fiscal 2019 price/earnings ratio of 30, versus 24 at our fair value, and a dividend yield of 3.4%, or 4.3% including franking credits. We forecast an EPS CAGR of 8% over the next decade.

The result beat management guidance, provided in February 2018, that first-half segment profit would decline versus the prior period, whereas it actually grew by 3%, implying annualised growth of 6%, and was flat on a constant-currency basis. However, the real surprise was that EBITDA grew by 15% versus the prior corresponding period, which partly reflected the foreign exchange boost and a weak comparable period, but most notably good cost control and operating leverage. Yet despite the strong first half and guidance that revenue growth from the U.K. businesses would accelerate in the second half, management maintained full-year profit guidance that constant-currency segment profit growth would be between 3% and 7%, or between 5% and 9% if current exchange rates persist. The midpoint of guidance implies a second-half segment profit of AUD 66 million, which implies no growth relative to the prior comparable period and a fall of 2% versus the first half.

Iress’ individual divisions produced mixed results in the first half with revenue from the Asia-Pacific financial markets division, which comprises 20% of the group, falling by 3%. We still forecast long-term annual growth of just 1%, owing to the structural pressures facing the sector. However, the Australia and New Zealand, or ANZ, and U.K. wealth management divisions continue to benefit from increasing regulatory requirements and delivered respectable revenue growth of 9% and 6%, respectively, in line with our long-term forecasts. The biggest surprise came from the U.K. lending division, which comprises just 7% of group revenue but grew by 31% on a constant-currency basis as the division implemented new projects and transitioned to a subscription model. We’ve increased our long-term annual growth forecasts for this division to 9% from 5%. Iress’ capital-light business model continues to enable strong cash flows, sustainable dividends, and relatively low financial leverage, which we expect to continue. Debt metrics are extremely comfortable with a net debt/EBITDA ratio of 1.5 and EBIT/interest expense of 19 as at June 30, 2018. We expect Iress’ strong cash flow generation to drive improvement in these metrics over the coming years.