Fintech company Iress Ltd flags more strong growth in FY16: Should you buy?

Shares in Australia’s leading financial technology business Iress Ltd (ASX: IRE) have gained around 17% over 2016 as it continues to deliver solid organic growth while adding bolt on acquisitions to its expanding operations.

The company reports on a calendar year basis and for the first half of the year posted 20.7 cents in earnings per share, with a forecast for strong full year revenue growth and “solid” constant currency profit growth.

The full year profit result will be negatively impacted by the post-Brexit plunge in the value of the British pound as Iress earns around one third of overall revenues from the UK due to its deep footprint across the giant UK financial services industry.

In fact in the UK it claims to have more than 95% of wealth managers on its platforms, while in Australia and New Zealand it reports that more than 90% of buy and sell side brokers use its software, data feeds, pricing or trade processing services.

That’s the kind of market dominance that represents a competitive moat and the deep integration of its technologies into the daily work flows of its financial services clients means its products are sticky as it is unlikely a chief operating officer is ever going to uproot a firm’s whole trading systems and processes to use a rival system for example.

This also provides Iress with strong pricing power across its core wealth management services in Australia and the UK. Famous clients include everyone from Australian trading giant Commonwealth Bank of Australia (ASX: CBA) to asset servicing giant Bank of New York Mellon and leading US brokerage Charles Stanley.

Iress has also been on an acquisitive trail recently to move into the booming Australian superannuation software industry via the up to $90 million purchase of Financial Synergy. It is expected to be 2% accretive to EPS in 2017 and gives Iress the opportunity to cross-sell services to its core enterprise client base.

Others in the superannuation and financial technology sector include Hub24 Ltd (ASX: HUB) and Class Ltd (ASX: CL1), both of which have been star performers in their short lives as listed companies.

Iress’s balance sheet is in reasonable condition with net debt of $157.3 million sitting at around 1.3x FY15’s profit. It also offers a decent partly-franked trailing dividend yield around 3.5%, with reasonable expectations for dividends to edge higher in line with earnings over the year ahead.

As a high-quality business with a strong return on equity it trades on a valuation around 29x annualised EPS of 41.4 cents per shares when selling for $11.75. Evidently this is on the expensive side and the stock looks a hold for now, although given its attractive mixture of income and growth potential I think the stock is a buy in the region of $10.50.

As an alternative investors could consider junior financial technology rival GBST Holdings Limited (ASX: GBT) which also operates mainly in the Australian and UK financial services markets. However, it has a mixed track record and none of the market-leading competitive advantages of Iress in my opinion.

It's not just Iress that pays Big, Fat, Dividends

This company's dividend is almost the stuff of legends. Its reliable cash flows support a high payout ratio, and the company's stash of franking credits are the cherry on the top of the dividend cake. Based on the last 12-months of dividends, shares are offering a fully-franked 6.5% yield, which grosses up to a whopping 9.3%, when those franking credits are included.

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Motley Fool contributor Tom Richardson owns shares of IRESS Limited. The Motley Fool Australia owns shares of Class Limited.

You can find him on Twitter @tommyr345

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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