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Why the Iress Ltd share price is trading at 52-week lows

The share price of financial services business Iress Ltd (ASX: IRE) is down 3.37% to $10.60 in lunchtime trade following yesterday’s release of its full year results for 2017. The stock managed to make new 52-week lows of $10.49 this morning, before bouncing and is now down 8.54% since Wednesday’s close.

What happened?

Group revenue grew by 10% to $430 million (up 13% in constant currency) on FY16 following a positive contribution from the Financial Synergy and INET BFA acquisitions.

The company enjoyed revenue gains across all of its operating segments except for Lending which was flat. The biggest contributor to group revenue growth was the Australian and New Zealand Wealth Management segment, which saw operating revenues rise by 33% to $125 million, driven by an increase in client deliveries and strong demand from existing clients for the company’s financial planning software.

Despite the impressive growth in group revenues, a significant 15% cumulative increase in product technology, operations and corporate costs resulted in group segment profit rising only rising by 2% on FY16 to $125 million (up 3% at constant currency). Management attributed the material rise in expenses to recently acquired businesses, an increase in recruitment and higher wages. Whilst net profit after tax increased by 1%, earnings per share declined 4% to 35.4 cents due to a higher share count. 

The company’s balance sheet remains reasonable with net debt at $165.8 million at December year end, which represents a leverage ratio of 1.3 times segment profit.

Foolish takeaway

Iress has frequently traded at premium to the general Australian market reflecting the high quality nature of the business. After missing market expectations in August, the company has delivered another result below expectations, which has resulted in the share price falling to levels not seen since 2016.

At current prices, the stock trades around 30 times trailing earnings at a 4.15% dividend yield, which comes with partial franking credits reflecting the global nature of the business. The current valuation appears a little high given the 2017 result and management’s outlook for 2018.

Management has guided for 2018 segment profit to grow within the 3%-7% range on a 2017 constant currency basis. However, growth will be weighted towards the second half with the first half projected to decline from 2H17 due to a lower bonus provision.

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Motley Fool Contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia has recommended IRESS Limited. 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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