ASX: BUY HOLD SELL – IRI

Integrated Research is another Aussie IT success story. The company operates in more than 75 countries and services some big, global businesses (as can be seen in the graphics below) providing performance monitoring, diagnostics and management software solutions for business-critical computing environments.

Source: IRI FY2019 Results Briefing

The Company's principal activities are the design, development, implementation and sale of systems and applications management computer software for business-critical computing, unified communication (UC) network and payment networks. Its geographical segments include the Americas, Europe, and Asia-Pacific.

IRI is focused on three markets: Infrastructure, which includes users of computing systems; Communications, which includes users of Internet Protocol telephony and UC applications, and Payments.

IRI has been in business since 1988 and its founder and chairman Steve Killelea still holds a significant amount of stock (38%), despite a recent sell-down.

The results in August were impressive, with FY NPAT of $21.9M coming in towards the top end of previous guidance and right on expectations. Revenue of $100.8m was in the middle of the guidance range, whilst EBITDA at $40.2m was also bang in line with estimates. The company declared a final dividend of 3.75 cps – fully franked.

The outlook was positive, with the company saying that the continued focus is on new customer acquisition. That, along with the long-term cloud roadmap, are significant factors that management expects to support growth through FY20 and beyond.

THE NUMBERS – These are the numbers from our STOCK BOX.

Main observations:

  • ROE is exceptional at almost 30% – anything above 20% is excellent. It is expected to remain strong in future periods as well, holding above 28%.
  • Revenue growth is 8% this year and expected to be 7-8% for the next three years – this is excellent.  
  • EPS growth is very healthy, at 13% this year and expected to be 6-11% in the next three years.    
  • The stock is not particularly cheap, at 23x 1-year forward earnings, although this is expected to moderate in future periods – and is far more palatable than many other Aussie tech names.
  • Gross yield is around 3.5%, which is not great, but not awful for a growth stock either.     
  • The stock has modest coverage from brokers – 1 STRONG BUY and 1 HOLD.
  • The stock is trading at a 9.2% discount to intrinsic value and a 0.5% premium to the average target price of brokers surveyed by Thomson Reuters.

WHAT SORT OF INVESTMENT IS IRI?

If you buy IRI you are investing in a tech growth play. It is not particularly expensive and it has stable and growing revenue and earnings – as can be seen in the table below. IRI claims that 89% of its revenues are recurring and that contracts have multiyear durations. The company added 26 new customers over the past year (up until August). In their maintenance division, the retention is 95%. Furthermore, those revenues are diversified; the top 10 customers account for less one-third of total revenue. So, whilst losing a major customer would hurt, it wouldn’t cripple the business. While IRI is a growth name, it also has a very solid base with little leaking out the back door. Finally, it doesn’t have the same nose-bleed PE’s that a lot of other Aussie tech names have.

SHORT-TERM TECHNICAL VIEW

Since bottoming out at 150c in December, the stock has more than doubled to presently be trading around 315c. The chart looks constructive, having recently retested the 250c region and confirmed it as support, and a run into the recent high around 350c – and beyond – appears likely.

SHORTING

This chart below is taken from the Short Man website. The grey line is the share price, the blue line is the percentage shorted (left-hand scale). As can be seen, short interest for the most part has hovered around 2%. More recently, it has pulled back into approximately 1%. This is a positive sign but not a very strong one. Short interest at these levels is largely irrelevant.  

CONCLUSION

A growth company that has a strong and stable earnings base, isn’t reliant on a few major clients, boasts an impressive stable of clients, doesn’t have a ridiculous PE and has a clear pathway for growth. That’s what you are getting with IRI and we don’t see any reason not to buy the stock. We would be comfortable being buyers around current levels, ideally for a growth portfolio.