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Iress Ltd shares race higher on improved cost management

Shares in Australia’s most established financial technology businesses Iress Ltd (ASX: IRE) raced 13% higher this morning after it reported a net profit of $32 million on revenue of $229.7 million for the six-months ending June 30, 2018.

Iress reports on a calendar year basis, with profit and revenue both up 8% on the prior corresponding period (pcp). On an adjusted basis profit is up 13% on the pcp, or 11% on a constant currency basis.

The group will pay an interim dividend of 16 cents per share, which is flat on the prior period and places the stock on trailing yield of 3.2% with tax credits franked to 60%.

As at period end net debt stood at $189.7 million, which is reasonable at 1.4x segment profit given this is a business where 90% of the revenue is recurring in nature, which gives it quite a defensive nature.

Buy-side institutional fund managers and other professional investors will likely be familiar with Iress’s core financial data platform and software that is market leading in supporting blue-chip clients worldwide. It is also sticky in nature, which means clients are unlikely to switch software provider given how integral Iress’s technology is to the daily operations of many financial services oriented clients. This sticky nature is another attractive characteristic of the business given the recurring revenues.

In the recent past Iress’s weakness has been cost blowouts despite some steady revenue growth, with the profit growth this half coming largely on the back of what management described as “flat” cost growth.

Overall, management reaffirmed guidance for segment profit to grow 3%-7% over the calendar year as it continues to bed down recent acquisitions and work on managing its costs better.

However, it also flagged that if FX rates remain the same then segment profit could grow 5%-9% on the prior year, although it’s notable Iress generates a lot of profit in Brexit-rocked sterling. As such the AUD/GBP spot rate will be volatile over the six months ahead, with a no-Brexit deal likely to send sterling lower and hurt Iress’s profit.

Iress is also expanding into the financial advice space with its XPLAN financial advice platform in the UK market, with a small lending (mortgage) platform also posting revenue of £8.4 million in the UK.

Other junior fintech rivals on the ASX making waves recently include Hub24 Ltd (ASX: HUB) and Praemium Limited (ASX: PPS), both of these could be worth a spot on the watch list.

Foolish takeaway

Iress is a business with some attractive economics and a market-leading product, although its cost control problems led me to sell my entire holding over 2018 in favour of better investment opportunities. The stock is also relatively expensive on a conventional valuation basis and I’d rate it no more than a hold for now.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

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 Scott Phillips.

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