IRESS: Merger bonus

About the author:

Author name:

By Ivor Ries

Job title:

Senior Analyst

Date posted:

03 December 2019, 2:30 PM

Sectors Covered:

Information Technology, Online Media

• Mergers between major industry superannuation funds continue to work in favour of IRESS’ Acurity administration system.
• The proposed Tasplan-MTAA merger will be modestly accretive to IRESS’ revenues and earnings in our view.
• The merger will increase total funds administered on the Acurity platform to more than A$250 billion.
• Our DCF valuation, which drives our share price target, increases (Morgans clients can login to view detailed reports and price targets).
• We maintain an ADD recommendation.

Industry consolidation working in favour

The planned merger of industry superannuation funds Tasplan and MTAA, announced last week, is positive news for IRESS.

Under the merger plan the back offices of both industry funds will be consolidated on a single technology platform, which is IRESS’ Acurity administration system.

IRESS will earn additional license fees once the funds are migrated. We estimate that the merger will be mildly earnings accretive to IRESS from FY21.

To date, industry consolidation among industry funds has mostly worked in favour of IRESS’ low cost and highly-automated system.

Upgrade to forecasts, valuation

We have upgraded our forecasts and valuation to reflect incremental revenues from the MTAA-Tasplan merger.

We assume ~A$6m in incremental license and service revenues, a gross profit margin of ~60%, and higher D&A expenses as some development costs are absorbed. Our assumptions result in recurring EPS increasing ~1.7%.

Our DCF valuation, which drives our share price target, lifts (Morgans clients can login to view detailed reports and price targets).

Risks and catalysts

Risks to IRESS earnings and share price include:

1. Disruptions to global financial markets
2. Irrational competitor behaviour
3. Loss of major clients
4. External attacks on the company’s systems.

Potential re-rating catalysts include:

1. Major new client wins
2. Value-accretive acquisitions

Investment view

IRESS offers investors exposure to the global markets for financial market data and software.

The company is a core systems provider and, with most of its revenues from recurring license fees, its revenues are less volatile than its customer base would suggest.

As our price target implies a total shareholder return of greater than 10%, we maintain an ADD recommendation.

More information

Morgans clients can login to view our detailed report and share price target for IRES (IRE). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: Analyst owns shares. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.