IRESS: All eyes on the EQT outcome

About the author:

Scott Murdoch
Author name:
By Scott Murdoch
Job title:
Senior Analyst
Date posted:
20 August 2021, 12:00 PM
Sectors Covered:
Diversified Financials, Professional Services

  • IRESS's (ASX:IRE) result was pre-released: pro-forma revenue (cc) +1% on pcp; segment profit +5% on pcp; DPS flat on pcp at 16cps.
  • IRE reaffirmed FY21 guidance: Segment profit A$164-168m (implied ~18% hoh growth) and reported NPAT A$70-77m. Excluding annual leave provisioning, 2H21 organic growth of ~7-8% is required, which is achievable.
  • The short term relies on the EQT’s (or a competing) takeover bid. EQT has 30 days exclusive due diligence, which runs until around 10 September. We note there is ~4.3% upside to the current NBIO of A$15.75ps.
  • We retain our price target at our DCF valuation of (login to view), noting the indicative bid is higher. In the absence of corporate activity, we consider IRE as fully valued. Formalisation of the offer (or another bidder) is clear upside risk.

Event: 1H21 (pre-announced) – reported NPAT flat on pcp

IRESS (ASX:IRE) reported: revenue +7% to A$290.2m (up ~1% ex-OVH and on constant currency); Segment profit (pre-SBP) of A$75.5m (+5% on pcp); underlying NPAT effectively flat at A$27.1m after removing the provision add-back benefit of A$15.2m.

An interim dividend of A$0.16cps was declared (flat). IRE will undertake a A$100m buy-back (debt funded) to neutralise share-based remuneration and the DRP.

Net debt increased by A$58.5m to A$183.6m, driven by an FY20 dividend payment (A$54.8m); on-market treasury buyback (A$20.4m); and deferred consideration to QuantHouse (A$8.8m).

Operating cash flow conversion of 90% was solid (vs pcp/2H20 134%/86%).

Analysis: all about the takeover for the meantime

IRE reaffirmed formal guidance for FY21 (implied 2H21 segment profit growth of 16-21% hoh). 2H21 is expected to benefit from growth in APAC Superannuation (~A$4m); UK & Europe Wealth Market (~A$4m); and benefits in annual leave timing (~A$8m).

Excluding the annual leave provision impact, IRE expressed high confidence in achieving the ~8% hoh required growth rate, noting two new UK Mortgage clients going live and Guild Super going live (in Super Admin) from April. 

Divestment and takeover in focus: The sale process for MSO will commence near term with IRE remaining relatively confident of an offer within CY21. IRE did not provide any further update on the EQT NBIO, with exclusive 30-day DD underway (commenced ~10th August).

IRE’s detailed 5-year growth strategy will take a back seat until the takeover outcome is known. Three key growth areas include: UK Wealth (moving to 14% market share); Superannuation (moving to 6% market share); and Investment Infrastructure (moving to 3% market share).

Full integration of the OneVue registry and investment platform into Xplan (providing a single advice technology platform), will be a key product development for the group. Whilst the strategy is logical, dislodging advisers from the current leading platforms won’t be easy.

Forecasts aligned with and valuation update

Our FY22/23 reported NPAT forecasts are downgraded by ~5-7% to align with IRE’s stated investment objectives (additional A$15m post tax spend in FY22/23). The MSO business remains in our forecasts until divestment is certain.

Investment view: Hold, a formal takeover bid presents upside risk

We maintain a Hold recommendation. We see strong strategic merit in IRE’s technology and product plans longer term; however, there is some distance to go before there is financial evidence IRE is executing on the strategy.

In the absence of a takeover offer being formalised, we view IRE as fully valued (login to view price target). There is ~4% upside to the current EQT offer, although alternative interest can’t be ruled out. Under the scenario that the offer is withdrawn, we see +10% downside near term in the share price.

Price catalysts

Indicative takeover bid formalised; better-than-expected sale proceeds from MSO.

Risks: withdrawal of takeover

Takeover bid withdrawn; strategy execution; loss of a large client.

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