Morningstar Iress analysis says adviser exits have hit trough

Mike Taylor

Managing Editor/Publisher, Financial Newswire

29 May 2023

Leading research and ratings house, Morningstar is pointing to a positive outlook for financial software provider Iress because financial adviser exits have hit their trough.

In an analysis of Iress published late last week, Morningstar said it believed subscribers to the company’s products such as Xplan would remain sticky as its products become entrenched in client workflows and systems.

“The outlook for its wealth management software is even more positive than the trading and data software, with adviser exits now at their trough and impending regulatory changes supportive of new entrants,” the Morningstar analysis said.

“This means despite the consolidation in adviser practices, there is still room for revenue to grow from higher number of users or higher levels of usage. Meanwhile, we project revenue growth in the mid-teens for the superannuation administration business as Iress grows its clientele and benefits from the superannuation system’s growth.”

“On the other hand, we anticipate low-single-digit declines in revenue for Iress’ noncore business units (U.K., Canada, South Africa, and managed funds administration, or MFA, and platforms) over the five years to 2027,” the analysis said.

“This means we expect their revenue streams to meaningfully contract in real terms, as management sweats them for profit and cash flow, which will likely include increasing prices. As it stands, the MFA and platforms business is expected to be sold by the end of 2023, and the mortgages business is also up for sale.”:

More broadly, the Morningstar analysis said that Iress is in reasonable financial health due to its highly recurring revenue, as well as lower capital intensity relative to typical industrial firms.

“However, we believe its financial leverage and interest cover are suboptimal due to excessive shareholder payouts—averaging around 90% of segment profit less operating depreciation and tax at 30% over the last five years,” it said. “Dividends and share buybacks often exceeded available free cash flows due to Iress’ limited cash flow conversion. Hence, the firm has relied on debt (and to a lesser extent, equity) to shore up cash. “

“We believe Iress needs to strike a better balance, notably by lowering its payout ratio to around 75-80% and reinvesting into higher-returning assets to produce more maintainable cash flow growth. This would support debt repayments and dividend payouts without unnecessarily straining the balance sheet.”