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Why I’m banking on Iress Ltd shares

The Iress Ltd (ASX: IRE) share price is among the top performers on the S&P/ASX 200 (Index: ^AJXO) (ASX: XJO) today to climb 3% to hit a record high of $13.36 despite the fintech leader releasing no news to the market.

Iress reports on a calendar year basis and for the full year ending December 31 2016 grew net profit 7% to $59.5 million on revenues of $389.7 million.

It also paid total dividends for the full year of 44 cents per share, despite earning just 37 cents per share in net profit of $59 million.

However, $21 million in non-cash depreciation and amortisation charges hit the net profit over the year with net cash inflows from operating activities (or OCF) actually landing at $90.6 million, or more like 56 cents per share. It also enjoyed a near $22 million foreign exchange gain over 2016 thanks to the softening Australian dollar that helped to lift OCF.

On that basis the company actually trades on a trailing price to OCF per share ratio of around 23x by my calculations, with the company forecasting another “strong” year of growth in 2017. The recent 44 cents per share dividend also represents a handy trailing yield of 3.3% franked to 60%.

As at December 31 2016 net debt stood at $154.6 million, which is manageable at 1.3x annualised segment profit and includes cash in hand of $23 million.

Outlook

On an OCF per share basis the stock still looks reasonable value to me, given 2017 should see earnings per share accretion from its recent $90 million acquisition of the Acurity superannuation platform from Financial Synergy. Increasing free cash flows should also see a decent dividend lift, with the trailing 3.5% yield already reasonable.

Iress also offers defensive revenues by virtue of the deeply integrated nature of its core product offerings, which mean it has a narrow moat as its blue-chip clients are unlikely to switch to the limited competition on offer.

Importantly, this also means a large amount of its revenues are recurring so it does not have to keep selling products (like a medical device company for example) just to keep its head above water.

Iress also earns a lot of revenues overseas and has plenty of potential to expand globally which is a positive given the limited size of the Australian markets.

I have written multiple times before of my belief that Iress ticks the boxes as one of the best growth stocks on the ASX. However, Iress’s strengths are no big secret and the company trades on a demanding multiple at $13.35 per share. Overall though, I expect a strong 2017 will see it go on to crush the returns of the wider market over the years ahead.

Other high-quality stocks in the fintech space include cloud-accounting business XERO FPO NZ (ASX: XRO), or superannuation platform provider Class Ltd (ASX: CL1). Arguably all three retain strong long-term outlooks, although on current valuations my preference is for Iress and Xero.

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Motley Fool contributor Tom Richardson owns shares of IRESS Limited and Xero.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Class Limited and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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