“Knowledge is power,” wrote Sir Francis Bacon. In financial markets, information service providers such as Refinitiv, Bloomberg and Factset know that knowledge is also money. Putting money to work is the job of financial software firms such as Iress Ltd. (IRE.AX), the dominant player in Australia and a competitor elsewhere in the world.
Information services is a fast-growing area as companies continue to require regulatory and risk solutions — and regulators prefer that such services be provided by a third party. Another booming area is order management systems. Gone are the days of a single stock exchange. As liquidity fragments, it becomes increasingly important to provide customers with the best execution across various securities markets.
Iress is expanding out of its Australian home into the U.K., Canada, South Africa and Asia. As the size of the financial services industry increases – due to the growth in assets under management –financial information providers are likely to be a boon for investors, with barriers to entry in the larger markets and a structural growth underpinning.
However, it seems all this is well represented in Iress’ current share price. The company P/E has now moved far above its traditional range to a five-year high of 22.9. Iress briefly traded above this multiple in the halcyon days of 2007 but its five-year median P/E valuation is 18 and even over 15 years, the median is only 18.4.
Exhibit 1
Source: Eikon / StarMine
Hold recommendations
This opinion seems shared by the sell side, where the median price target is A$8.57 against a current share price of A$10.14. Of course, with Iress having made 14 deals in 10 years and the largest having occurred in 2013 this translates into hold recommendations – with seven out of eight analysts recommending investors sit on the sideline.
Exhibit 2 shows the IV model page from Eikon and you can see that the StarMine dividend discount model values Iress at A$8.53, almost identical to the sell side median, meaning that the company appears to be about 19% above its fair value.
Exhibit 2
Source: Eikon / StarMine
Expansion strategy
Iress continues to expand beyond its domestic market and now offers solutions in most key markets (aside from the U.S.) – however one has to expect flawless execution and a passive response from competitors to be comfortable with the 7% compounded growth rate implied by the current valuation. As Iress appears to be growing more comfortable with acquisitions perhaps such an expectation will prove conservative – but I suspect shareholders will be more comfortable if they see those deals being paid for with expensive scrip, rather than cold hard cash.
Exhibit 3
Source: Eikon / StarMine
Good fundamentals but declining margins
Iress remains fundamentally well run, with strong free cash flow, however it does seem to be experiencing a secular decline in its operating and net margins (see image 3). As the company expands beyond Australia and works to develop market share in new regions, that’s perhaps unsurprising – but the company attracts a multiple premium because of its strong free cash flow story and growth expectations. Any misstep and its growth multiple will be quickly under pressure, and the “roadrunner moment” when you look down and realize there’s nothing supporting you, may be painful for shareholders still on board.
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