Treasure Chest | Apr 15 2020
This story features IRESS LIMITED. For more info SHARE ANALYSIS: IRE
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Morgans suggests financial markets software provider Iress is that the low end of the risk spectrum.
-Business at the lower end of the risk spectrum
-Only small revenue risk from deferrals
-Acquisition opportunities ahead
By Eva Brocklehurst
Morgans, applying caution, downgrades forecasts for Iress ((IRE)), assuming some slowing of the UK mortgage system implementation and a deferral of the roll-out of new XPlan customers.
Nevertheless, the broker retains an Add rating with a $14.94 target because a very high proportion of recurring revenue streams puts the company at the low end of the risk spectrum.
The company still assesses it is on track to meet guidance for segment profit growth of 3-8% in FY20 but has withdrawn guidance in line with the recent ASX circular to listed entities. Still, Iress has not noticed any deterioration since the pandemic broke out.
Iress offers exposure to global markets for financial market data and software and most of its revenue stems from recurring licence fees. The main risk lies with service and implementation fees, a more volatile revenue stream and also lower profit.
The company won a substantial number of new customers in 2019 and implementations are now largely completed, so this revenue is not at risk. The broker also envisages little deferral risk for superannuation administration software. Moreover, new XPlan customers in late 2019 did not pay a full year's fees. As these are now fully implemented, there will be a full-year licence fee due in FY20.
Less than 10% of group revenue is non-recurring so some customers could defer implementations and Morgans assumes some new mortgage software clients will choose to defer. The risk here is with three UK mortgage lenders, which contracted the implementation of the Lender Connect mortgage sales & origination service late in 2019.
If all three deferred to the end of FY20, Morgans estimates a revenue impact of around -GBP2-3m. Regardless, given the need for all mortgage lenders to become more efficient deferrals are likely to be temporary.
Meanwhile, the business is in an "exceptionally strong" financial position. Net debt is negligible and Morgans suspects there may be some "nicely accretive" acquisition opportunities ahead. Most of the product development costs are locked into annual budgets but there is room to trim some aspects. Discretionary spending can also slow down significantly.
There are two Buy, one Hold (Credit Suisse) and one Sell (Macquarie) for Iress on FNArena's database. The consensus target is $13.28, suggesting 26.7% upside to the last share price the dividend yield on FY20 and FY21 forecasts is 4.4% and 4.7% respectively.
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