Management transition: CEO Andrew Walsh (2009) is retiring, to be replaced by Marcus Price effective October 2022. Marcus was the inaugural CEO of PEXA Group (PXA) and has held senior positions at NAB and BCG. The change in CEO creates an element of risk, particularly given FY25 targets for IRE to us look reasonably aggressive. These targets were set under Walsh.
FY25 growth targets look optimistic: IRE expects to deliver >25% growth in Investment Infrastructure, >10% growth in Superannuation and 7% growth in UK Wealth revenue growth. This will require Iress to deliver growth that historically they have not been able to sustain. 4-year revenue CAGR implied to hit the lower-end of the FY25 target is ~7-8%. Organic revenue growth over the past 5 years averaged just 3%. Iress is going to need to deliver a step-change in growth to achieve its targets.
Investment Infrastructure product launch Nov 2022: The pending launch of the Iress’s Australian based ‘Investment Infrastructure’ product combines Iress’s core ASX trading software with Australia’s largest unlisted funds registry.
Success in the Investment Infrastructure will be critical if Iress is to reach its FY25 revenue targets. Evidence of success is likely to be long dated, which we think will keep a cap on the share price.
1H22 result was mixed: Revenue growth across the core APAC trading/advice highlights the benefits of Iress’ market leadership and Superannuation is gathering momentum, with a large client win seemingly imminent. Conversely, a soft UK and cost inflation have pulled FY22 Segment profit guidance to the low end of the expected 7-10% growth.
Hold Rated: IRE has outperformed many of its technology growth peers through 2022. High recurring revenue, solid cash flow, and on-going share buyback have all helped. At 25x forward multiple, IRE valuation has improved, but this does not strike us as compelling value given the backdrop of CEO transition and the likelihood of long-dated evidence of success with new products.
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.
Investment View
Iress is a high-quality business with a long track record of growing earnings. Management guidance for net profit target for FY25 of $120 million, requires a sharp acceleration across the core growth segments to achieve it.
We remain cautious that with management transition underway, that new CEO will walk away from the targets and rebase medium term earnings expectations. Whilst IRE has de-rated following the selloff in technology stocks, the multiple does not strike as compelling enough to adopt a more positive view.
An attractive dividend yield of +4% and capital management $100m buy-back (70% complete end August) helps mitigate downside risks, the lack of earnings catalysts may leave the share price range bound for a while yet.
FIGURE 1: FY25 MANAGEMENT GUIDANCE IMPLIES AN ACCELERATION IN IRESS EARNINGS GROWTH
