Small Caps | Mar 10 2021
This story features INFOMEDIA LTD. For more info SHARE ANALYSIS: IFM
After the pandemic caused a slump in earnings in the first half, heavily impacting the share price, brokers suggest it may now be time to revisit Infomedia
-Next Gen platform continues to gain traction
-Prospect of further acquisitions over 6-12 months
-High level of recurring revenue from parts & service
By Eva Brocklehurst
Automotive software specialist Infomedia ((IFM)) remains on track to record modest growth, after lockdowns and restrictions prevented sales from being converted to revenue and earnings in the first half.
The slump in earnings heavily impacted the share price and brokers suggest this was undeserving as, understandably, the pandemic brought installations to a standstill. The company was also unable to fulfill new dealership licences in Europe and the US.
Bell Potter suspects the drop in the share price was framed by a weaker outlook for the second half than many had expected. Still, the broker believes the reaction was overdone as the business is performing well despite a challenging operating environment.
Service revenue was up 9% in the first half while parts revenue was down -6%, contributing to an operating earnings (EBITDA) decline of -2%. Increased capitalised development costs caused a -16% decline in cash operating earnings.
Nevertheless, over the medium term, management expects growth will be sustained and has an aspirational target for revenue of $200m by 2025. While restrictions are still affecting sale conversions this situation should now start to improve.
Credit Suisse points out the Next Gen platform continues to gain traction amid several small additional contracts. Major deals should add a sustainable 6-7% to revenue going forward, in addition to new opportunities, while the historically more difficult Americas could benefit from a leveraged sales model.
The broker believes it is time to revisit the stock, noting benefits of acquisitions will eventually materialise, and retains an Outperform rating with a $2.30 target. UBS, with a Buy rating and $2.10 target, incorporates reduced rolling out of licences in FY21 and a recovery in FY22.
UBS suspects the benefits from the subscription model will take a while to recover prior momentum. Nevertheless, the long-term outlook is unchanged and there is a strengthened product offering after the Next Gen platform is completed. The broker assesses this should deliver revenue growth that will translate to around 15-20% in terms of operating earnings.
Bell Potter believes there is reasonable prospect of acquisitions over the next 6-12 months and assumes acquisitions worth $25m will materialise in each of FY22 and FY23, and be accretive to earnings. The balance sheet is net cash, although a capital raising during the last year is diluting forecast earnings per share. Still, Bell Potter expects double-digit growth in EPS in FY22 and FY23.
The broker re-evaluates its modelling and upgrades to Buy from Hold, retaining a target of $1.75, highlighting that all products are sold on subscription and as a result there is a high level of recurring revenue. The main risks to the business generally are the loss of license agreements and key customers along with product obsolescence.
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