Will new management deliver profit growth at Infomedia Limited?

Credit: niconico0

Automotive software as a service (SaaS) provider Infomedia Limited (ASX: IFM) announced its financial results for 2016 earlier today. The company’s shares were unmoved by the news, trading at 68.5 cents this afternoon. Here are some of the key takeaways from the report:

  • Revenue up 12.8% to $68.1 million
  • Profit before tax (PBT) down 27.7% to $12.6 million
  • Earnings-per-share (EPS) down 22.6% to 3.3 cents
  • Dividends-per-share down 27.2% to 2.65 cents representing a 3.9% yield

Revenue growth would have been a mere 5% and profit would have tumbled even further if not for beneficial currency moves. Over time foreign exchange effects should even out but generally you’d hope that profit improves in favourable periods. However, since 2013 EPS has risen by a mere 0.01 cent despite the Aussie falling around 25% against its US namesake over this time.

Infomedia changed its management team during the year and this partly explains why profit fell despite higher revenue. The other reason that costs rose faster than revenue is that the company made investments in research and development and marketing in order to stimulate growth in future periods.

The company has guided for revenue growth in the high single digits and given it shouldn’t have to fork out for another management restructure, Infomedia could deliver an improved profit in 2017. Looking further ahead, it is too soon to say whether the new management team can drive the business forward or if recent investments will deliver sustained improvements in profitability.

As a SaaS company, Infomedia enjoys recurring revenues, high profit margins and has low capital requirements. However, I struggle to see where significant growth is going to come from and so for me the stock looks a little pricey given it has a price-to-earnings ratio of over 20 based on today’s results.

Those after exposure to the automotive industry might be better off taking a look at Burson Group Ltd (ASX: BAP) or ARB Corporation Limited (ASX: ARB). Both companies have a solid track record of growing revenue and EPS.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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