Morningstar tepid on Iress takeover prospects

The prospects of a takeover bid for Iress were not enhanced by its half-year results announcements, according to research and ratings house Morningstar which suggested they might “provide a suitor with ammunition to lower its offer price”.

In an analysis of the half-year result, Morningstar reduced its fair value share price estimate for Iress from $9.20 to $8.50 noting that “profitability improvements are likely to be slower and less pronounced than we initially expected”.

It noted that Iress is engaging with Blackstone and Thomas Bravo to determine whether an offer can be recommended by the Iress Board with Blackstone making an offer of $10.50 per share, which was subsequently withdrawn.

“We do not incorporate any probability of a successful acquisition of Iress, given a lack of detail. Today’s result could provide a suitor with ammunition to lower its offer price,” the analysis said.

“We forecast EPS to grow 6% per year over the next five years, with EBITDA margin averaging 27% per year. Comparisons with the five-year average are not like-for-like due to a previously more convoluted business mix – including platforms, mortgages, and superannuation administration – many of which have since been divested.

“Cost reductions and new product developments provide earnings upside. The firm seeks to remove $12 million-$16 million in corporate costs (around 3%-4% of group operating costs) while investing in newer product offerings. The strong high-single-digit revenue growth in trading and market data demonstrates that new feature enhancements can facilitate better product uptake and help increase revenue above inflation- level price rises,” the Morningstar analysis said.

“Still, Iress faces downside risks as it is a mature firm in a competitive market. For example, revenue in the domestic wealth business declined due to a client restructuring. Iress said it does not expect further disruptions, but we doubt this and note a similar defence was given last earnings season.

“We also believe expected profitability improvements will not manifest as quickly, given execution, timing, and market condition risks. Our new EPS growth and EBITDA margin assumptions are below our prior 8% and 28% forecasts.”

“First, revenue recovery in slower-performing channels such as domestic wealth requires new investments to improve client relationships and create business prospects. This takes time to yield benefits for a mature business like Iress. Additionally, the firm is concurrently pursuing multiple ambitious new product roadmaps spanning buy-side execution management systems, retirement income, artificial intelligence, and data insights.

“This presents the risk that these products cannot be delivered—and contribute to earnings—on time. In the absence of new product enhancements, competitive pressures may constrain Iress’ ability to increase prices and margins,” the analysis said.