IRESS has a pretty good track record of sales growth…
…and maintenance of margin. New business acquisitions, at lower structurally lower margins (e.g. UK mortgages) have decreased the average relative to the mid-to-late 2000s, but the past half-decade or so has been pretty consistent, and the successful integration of new business has been, in our minds, well managed overall.
Free cashflow generation is particularly robust. It’s a software company, so the comparatively minimal capex required to generate sales is to be expected. But still, it is good.
Wage inflation, particularly across tech, matters, given how in-demand those workers are. Equally, of late, some high profile tech layoffs (e.g. the recent announcements from Tesla, Facebook, and Microsoft) should help to ease this pressure on tech salaries (and expected salaries) over time as hiring slows.
Management expects to grow earnings by around 7%, which is consistent with the prior track record.
Tech, in general, has been de-rating, as we have long called for, given higher rates, higher inflation and the starting point of ludicrously high valuations.
However, the value spread (difference from highest to lowest average multiples) within the sector favours IRESS, particularly compared to peers like XRO and WTC or PME, which are trading on triple-digit forward-looking PEs, and often circa 10x revenues.
Overall, we think a 4.5% yield is a good starting consideration for the space, in which we have otherwise no exposures.
IRE also have some modest pricing power, particularly with Australia, as the dominant wealth management software provider, which strikes us as useful given the overall inflation backdrop. Software as a service tech typically fares quite well in periods of higher inflation, especially those that can reset prices intra-month, or intra-quarter.
Perhaps most importantly, consensus expectations are already tracking ahead of the required earnings trajectory embedded in the current valuation. After years of fairly flat earnings per share growth, the market had significantly lowered the expected growth profile, and it appears this capitulation (of sorts) is occurring just as management flag a pick/acceleration in growth.
Given a high-quality set of fundamentals (favourable product adoption, strong balance sheet, robust margins, good returns, a buyback, decent yield and plausible growth prospects) we are happy to take the risk.
Note also that IRE has a sizeable factor loading to Quality, which helps contribute to the overall portfolio’s QGARP (Quality Growth at a Reasonable Price) factor exposures.
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