Company Reports

Iress is positioned to deliver improved earnings growth through the strategic refocusing on its core business units in the Asia-Pacific, mainly in Australia. The core business consists of a trading and market data product, a wealth management platform and a superannuation administration system. This follows a prolonged expansion into lower-returning noncore and overseas markets, which have eroded the firm’s economic returns.

Narrow-moat Iress remains on track for near-term margin expansion. It is supported by a capital market recovery from turbulent levels in 2023, a renewed focus on its core Australian trading, wealth, and superannuation businesses, and cost reductions. We expect improving product up/cross-sell to support client retention and incremental new client wins. Cost reductions are mainly in noncore areas and are not likely to hinder revenue generation.

Narrow-moat Iress’ 2023 results were slightly better than expected. Underlying EBITDA fell by 12% from the prior year to AUD 128 million, above our prior forecast of AUD 123 million. The main driver was lower operating costs, driven by a new cost-out program, which boosted second-half EBITDA by 16% from the first half. Cost-outs will continue into 2024, with further savings expected. The 2% revenue growth was commendable as disruptions in the wealth management sector throughout 2023 hit trading volumes and the uptake of ancillary products. Second-half revenue in the flagship wealth and trading and market data divisions also grew relative to first-half 2023 and second-half 2022, indicating a potential revenue recovery from recent cyclical headwinds.

Iress is positioned to deliver improved earnings growth through the strategic refocusing on its core business units in the Asia-Pacific, mainly in Australia. The core business consists of a trading and market data product, a wealth management platform and a superannuation administration system. This follows a prolonged expansion into lower-returning noncore and overseas markets, which have eroded the firm’s economic returns.

Iress is positioned to deliver improved earnings growth through the strategic refocusing on its core business units in Asia Pacific, mainly in Australia. The core business consists of a trading and market data product, a wealth management platform and a superannuation administration system. This follows a prolonged expansion into lower-returning noncore and overseas markets, which have eroded the firm’s economic returns.

Narrow-moat Iress’ strategy update reaffirmed our view that it is merely undergoing a temporary earnings blip that should reverse in 2024. It also strengthened our conviction in management’s ability to improve Iress’ profitability. We increase our fair value estimate to AUD 9.60 per share from AUD 9.20, mainly from lower growth in operating expenses.

Our conviction in the thesis for listed wealth managers, asset managers, and their related service providers has strengthened after gathering insights from the recent 2023 Super & Wealth Summit, hosted by the Australian Financial Review. These firms are influenced by similar business drivers and industry trends. Most derive their revenue from funds under management and/or administration, or FUMA, which are driven by asset price movements and new fund flows from clients, and management fees or commissions on these FUMA.

We lower our earnings per-share forecast for narrow-moat Iress by 20% following updated full-year guidance. Like other enterprise software companies, Iress is experiencing longer sales cycles, as companies are becoming more cautious with their spending in a potential recessionary environment. As a result, Iress is downgrading its net profit after tax guidance for 2022 by 17% to AUD 56 million at the midpoint, down from AUD 68 million previously. We lower our forecasts in line with guidance, but our fair value estimate for Iress remains under review as we intend to cease coverage in November. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to client demand, investor interest, and staffing. The break in coverage of Iress is likely temporary and we will likely look to reinitiate in future.

We notify clients of our intention to cease coverage on Iress in November 2022 and place its fair value estimate under review. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to client demand, investor interest, and staffing. The break in coverage of Iress is likely temporary and we will likely look to reinitiate in future.

We expect Iress to maintain its dominant position in the Australian financial markets and wealth management software sectors due to its narrow economic moat, which is underpinned by customer switching costs and network effects. However, we forecast the mature Australian financial markets division to contract in real terms, in line with the industry, with a revenue CAGR of around 1% over the next decade as active fund managers are displaced by automated investment solutions. In contrast, we expect Australian wealth management revenue to grow at a CAGR of 7%. We expect margin expansion within the wealth management division to more than offset margin contraction within the financial markets division, enabling the group EBIT margin to expand to 25% by 2031 and EPS to grow at a double-digit CAGR over the next decade.

We expect Iress to maintain its dominant position in the Australian financial markets and wealth management software sectors due to its narrow economic moat, which is underpinned by customer switching costs and network effects. However, we forecast the mature Australian financial markets division to contract in real terms, in line with the industry, with a revenue CAGR of around 1% over the next decade as active fund managers are displaced by automated investment solutions. In contrast, we expect Australian wealth management revenue to grow at a CAGR of 7%. We expect margin expansion within the wealth management division to more than offset margin contraction within the financial markets division, enabling the group EBIT margin to expand to 25% by 2030 and EPS to grow at a high-single-digit CAGR over the next decade.

We have maintained our fair value estimate for narrow-moat-rated Iress at AUD 11.00 per share following its full-year result. The result was broadly in line with our expectations, although 2021 earnings guidance was slightly weaker than we expected. Despite a reduction in our short-term earnings forecasts, our long-term forecasts are largely maintained and, at the current price of AUD 10.08, the stock remains slightly undervalued. The market reacted positively to the result, pushing Iress’ share price up 5% following the announcement, which we surmise was due to the result exceeding guidance and the additional disclosure regarding likely long-term revenue growth and profit margins.

We have maintained our fair value estimate for narrow-moat-rated Iress at AUD 11.00 per share following its third-quarter trading update. Iress doesn’t usually provide quarterly updates but 2020 has been an unusual year and the share price has been weak in recent months, in stark contrast to many other technology stocks.

We expect Iress to maintain its dominant position in the Australian financial markets and wealth management software sectors due to its narrow economic moat, which is underpinned by customer switching costs and network effects. However, we forecast the mature Australian financial markets division to contract in real terms, in line with the industry, with a revenue CAGR of around 1% over the next decade as active fund managers are displaced by automated investment solutions. In contrast, we expect Australian wealth management revenue to grow at a CAGR of 7%. We expect margin expansion within the wealth management division to more than offset margin contraction within the financial markets division, enabling the group EBIT margin to expand to 25% by 2029 and EPS to grow at a high-single-digit CAGR over the next decade.

Narrow-moat rated IRESS’ first-half result was slightly weaker than we expected, and we have lowered our short-term earnings forecasts. The company provided 2020 earnings guidance with the 2019 financial result in February 2020, comprising segment profit excluding share-based payment growth of between 3% and 8%, to between AUD 156 million and 164 million, and nonoperating costs of AUD 3 million to 6 million. This guidance was withdrawn in April 2020 following the surge in coronavirus cases in Australia and associated movement restrictions.

We have maintained our fair value estimate for narrow-moat-rated IRESS at AUD 11.00 per share following its AUD 150 million institutional placement, and AUD 107 million all-cash takeover offer for OneVue Holdings (ASX: OVH) via a Scheme of Arrangement. The institutional placement has a negligible impact on our fair value estimate because it is small relative to IRESS’ equity value, and the AUD 10.42 placement price is close to our fair value.

We have cut out fair value estimate for narrow-moat-rated Iress by 5% to AUD 11.00 per share following a review of our financial model. But at the current market price of AUD 10.80, the shares are fairly valued. We have adjusted our earnings forecasts to more clearly reflect the introduction of the AASB 16 accounting standard for operating leases, which effectively reclassifies rental expense as depreciation and interest expenses. This has several impacts on company financial statements, and increases EBITDA, EBIT, and their associate margins. Our revised forecast approach enables a like-for-like comparison between historical and future forecasts.

Narrow-moat Iress remains overvalued relative to our fair value estimate of AUD 11.80. Iress is a scalable, capital-light business with a high proportion of recurring revenue and a narrow economic moat underpinned by material customer switching costs between providers and favorable network effects. We expect the company to benefit from the aftermath of the 2018 Financial Services Royal Commission as industry participants, such as financial advisers and superannuation funds, increasingly demand software that can create efficiencies, minimize costs and mitigate operational risks.

Narrow-moat Iress reported a slightly weaker first half than we expected. We have lowered our short-term earnings forecasts but not sufficiently to warrant changing our AUD 11.80 fair value estimate. At the current market price of AUD 13.21, we continue to believe Iress shares are overvalued. The market price implies a fiscal 2019 P/E ratio of 31 and dividend yield of 3.0% or 3.2% with franking credits. Our fair value implies a P/E ratio of 26, and dividend yield of 3.6%, or 3.8% including franking. We expect dividends to be 10% franked in fiscal 2019 but franking should increase to 35% from fiscal 2020.