The long term growth plans of Iress are enticing, but it could be mid 2023 before the evidence becomes visible.
IRE’s FY21 segment profit of $166.4 million was in line with guidance given in September 2021 and was a 6% increase on the prior year. The company is looking for this to grow 6-9% in FY22f excluding Mortgages which is on track to be sold in 1H22. The proceeds (estimated $220 million) are likely to be distributed to shareholders in 2022. This is in addition to the half-completed $100 million share buyback and dividends that are achieving a policy payout rate of 80% of profit.
Pro forma revenue in FY21 was 3% higher at $600.2 million and was strongest in UK trading, UK mortgages and North America. But revenue growth in UK wealth (2%), Superannuation (-11%) and Investment Infrastructure (4%) was underwhelming in the context of a medium term growth aspiration of 10-20% pa.
Net debt at the end of the year was up $125 million to $234 million mainly due to the distribution of $134 million to shareholders.
If Mortgages was not sold this year, it would contribute $13-14 million to 2022 net profit.
IRE’s transition to a Single Technology Platform is designed to drive speed to market and operating leverage. The company will spend a further $30 million (pretax) across 2022-2023 to advance this strategy.
Investment view
Management is sticking to its net profit target for FY25 of $120 million, but it will take a sharp acceleration across the core growth segments to achieve it. Superannuation, Investment Infrastructure and UK Wealth all delivered top line growth that was materially below medium term aspirations.
Importantly, the growth implied by the FY22 guidance (approximately 10%) is well below the c20% compound annual growth rate needed to reach the FY25 target. Right now, there isn’t much evidence that management is on track to deliver the revenue growth and operational improvements.
Giving the benefit of the doubt, a successful execution of the long term strategy can deliver significant value creation for shareholders. The near term catalysts are few, other than the Mortgages sale, and it may be mid 2023 before tangible evidence of progress begins to emerge.
For now, shareholders can cling to an attractive dividend yield over 4% and rely on capital management efforts for support but the lack of earnings
Risks to investment view
The disaggregation of the Australian advice channel may have as great an impact on IRE revenues as expected. The Superannuation and Investment Infrastructure segments might not gain the traction anticipated and the group might not gain the penetration of the UK Wealth management landscape targeted. Foreign exchange rates could also hurt the translation of profits.
Recommendation
We have retained our Hold recommendation.
