Iress (ASX: IRE) just missing a bit more growth in their service

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Overall Summary:

Iress is a technology service provider for the financial services industry providing SaaS, data and analytics, mortgage software, retirement advice etc. Its main revenue comes from the APAC region with that being 56% of its revenue contribution. Its share price had a notable increase after releasing its results for the 2021 financial year but has subsequent trended down. The company’s operation was solid with a decent dividend payout amount. However, its main concern is probably its limited growth aspect which means it’s slightly overpriced for that reason. If it can continue to grow its business at a reasonable pace I think this could be a very rewarding stock to own.

Fundamentals:

IRE revenue improved by 11% compared to previous year. The company reported 25% EBITDA margin for the year with net profit margin at 12%. This is very much in line with past performance despite a tighter margin in FY20. Cash conversion to EBITDA (I add back income tax to cash here to have a fair comparison) is quite good at 84%. These metrics are not as impressive as some of the more profitable tech companies — as an example, big names like Google or local Australian tech companies like Atlassian, Carsales.com. However, for a software company servicing businesses this is nothing to sneeze at. Enterprise customers are known to be more sticky than retail consumers and they will continue to reward whoever does well — which means IRE will continue to keep its margin. Due to it being profitable, they do not have to demonstrate neck breaking growth to have a good valuation.

Debt does not seem to be a concern. Though Yahoo’s data show me the debt / equity is higher than 70%, I think the lease liabilities should be separated out and that leads to leverage at 55%. They have increased their debt facility usage for the year, with $297m of their $400m borrowing facility drawn. However, they have no problem servicing debt with net debt / EBITDA stands at 1.5 and interest expense coverage ratio (EBITDA/interest) is at a high 23x.

The company’s usage of equity is quite good with ROE at 14%, although this is likely due to it being a software company which is not intensive on tangible assets. We probably care more about P/E here which is 28x. This metric is not high in itself in this industry but if we factor in growth PEG ratio is high at 2.9x. I think it’s just a bit high as its growth aspect is limited compared to the next hot thing in tech.

Full year dividend was 0.46c per share and this payment is around 4% of its current price.

Risk Statistics:

The annualized volatility (based on 6 months closing price data) of the stock is at 37% which is quite high. 5-day VaR is at -11% and 5-day expected shortfall is at -13% so its potential to fall steeply in a short period is limited historically. This means a potential stop loss strategy may very viable when holding this stock.

The information in this article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Please seek advice from a qualified financial adviser about your personal investments. Prices information and some past financial data are based on Yahoo Finance which is known to be inaccurate at times. Nothing can substitute doing your own research when you make decision about your money!