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Iress looks to UK for growth

Iress (ASX: IRE) a leading supplier of share market and wealth management systems in Australia, New Zealand, Canada and South Africa has released its interim results for the half-year ending June and announced an acquisition of UK firm Avelo.

Results

The results were basically as expected, with the weak value of trades on the ASX and low investor sentiment taking their toll on the Financial Markets division, but offset by growth in the Wealth Management division. Operating revenues grew 1.1% to $105.4 million however underlying profits fell 1.9% to $26.1 million. Pleasingly for shareholders the flat results allowed the board to maintain the interim dividend at 13.5 cents per share.

Acquisition

Overshadowing the subdued results was the announcement of the $360 million acquisition of Avelo Financial Services. Avelo is described as a “leading independent technology provider in the UK with a comprehensive product suite, clients spanning the entire financial services value chain, and an industrial technology capability for mortgage origination and processing.”

The purchase of Avelo, which appears to have a significant market share in the United Kingdom, will dramatically diversify Iress’ revenue streams. Currently around 70% of its revenue comes from Australia and NZ with Canada and South Africa making up the bulk of the balance. The expansion into Canada and South Africa has proved to be reasonably successful and shows that management has the ability to execute on its regional expansion plans. The Avelo acquisition does however appear to be a much larger and aggressive strategic move than previously employed which may leave some investors with reservations.

In conjunction with the acquisition Iress has announced a fully underwritten 2 for 9 renounceable entitlement offer to raise $206 million. The offer price is $7.15, which compares with a closing price prior to the announcement of $8.27. The ASX (ASX: ASX) which owns 20% of Iress and is its single largest shareholder has agreed to take up its full allocation in the capital raising.

Outlook

Guidance provided by management for the full year to December 2013, prior to the costs of the Avelo acquisition, suggest a continuation of the subdued revenue from subscriptions but once again offset by growth in wealth management sales which are expected to be stronger than previously expected. Overall management stated that “a smaller decline in segment profit is expected in 2013 than in the prior year.”

Foolish takeaway

Software companies such as Iress and GBST Holdings (ASX: GBT) have great leverage to improving financial markets thanks to their fully developed and reasonably fixed cost bases. However Iress, like a number of other high quality businesses, looks ‘priced for perfection.’ Trading on a price-to-earnings ratio of 27 times suggests this company should be producing double digit growth rates in revenues and earnings. Rather Iress is producing single-digit declines in earnings which might bring its premium rating into question.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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