Investment In Digital Advice Will Advance Core Business Amid APAC Wealth Sector Risks

Key Takeaways

• Strategic focus on core businesses and efficiency improvements enhances profitability and positions Iress for future revenue growth.
  
• Strengthened financial position through deleveraging and strategic investments supports growth and potential earnings improvement.
  
• Divestment led to a revenue drop, while headcount reduction may strain capacity, with APAC challenges and R&D spending risking future revenue and profitability.

Catalysts

Engages in the designing and developing software and services for the financial services industry in the Asia Pacific, the United Kingdom and Europe, Africa, and North America.

• The transformation program at Iress focused on financial discipline, performance accountability, and core business concentration, which included a significant cost base reset and divestment of nonstrategic assets. This positions the company for future revenue growth by allocating resources to core areas such as Trading and Global Market Data and Wealth Management.
  
• Iress reported a significant strengthening of their balance sheet and cash flow. The deleveraging strategy and refinancing of debt create a stronger financial position that can support reinvestment for growth and potentially lead to improved earnings through reduced interest costs.
  
• The company's improved operating leverage and cost management, including a headcount reduction and focus on efficiency, are expected to enhance net margins and thus increase profitability.
  
• The focus on digital advice and superannuation, along with strategic partnerships, particularly in the Wealth Management sector, could drive significant revenue growth. The expansion into digital advice represents a new frontier for wealth products, indicating a strong potential for future revenue increases.
  
• Investments in trading platform upgrades in response to industry changes (such as the single open initiative) and enhanced APIs are expected to offer added capabilities and services. This could lead to increased customer acquisition and retention, ultimately boosting revenue.

Iress Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Iress's revenue will decrease by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 14.7% today to 13.6% in 3 years time.
• Analysts expect earnings to reach A$78.0 million (and earnings per share of A$0.4) by about March 2028, down from A$88.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$98.4 million in earnings, and the most bearish expecting A$69.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.5x on those 2028 earnings, up from 16.6x today. This future PE is lower than the current PE for the AU Software industry at 59.5x.
• Analysts expect the number of shares outstanding to grow by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Iress Future Earnings Per Share Growth

Risks

• The divestment of nonstrategic assets, while strengthening the balance sheet, resulted in a revenue decline of 3.4%, highlighting a potential inability to maintain or grow revenues without asset sales.
  
• The reduced operating costs and headcount could strain workforce capacity, impacting ongoing operations and project delivery, possibly stalling revenue growth or expanding margins.
  
• The challenging headwinds in the APAC Wealth sector due to structural market changes and flat revenue growth, despite cost reductions, pose risks to future revenue stability.
  
• The emphasis on new projects, such as the buy-side EMS application, requires successful execution and adoption by clients; any delays or failures could impact revenue growth targets.
  
• The anticipated increase in R&D capital expenditure, which currently lags targets, could affect immediate profitability if anticipated revenue gains from these investments do not materialize.

Valuation

• The analysts have a consensus price target of A$9.558 for Iress based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$11.35, and the most bearish reporting a price target of just A$8.4.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$572.1 million, earnings will come to A$78.0 million, and it would be trading on a PE ratio of 29.5x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$7.97, the analyst price target of A$9.56 is 16.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.