The Iress Ltd (ASX: IRE) share price is down nearly 25% this year. Are Iress shares now undervalued?
IRE share price chart
Source: Rask Media 1-year IRE share price chart
Iress provides software to the financial services industry, and is used by more than 9,000 businesses and 500,000 users globally.
The company’s software spans trading and market data, investment management, financial advice, superannuation, mortgages, life and pensions.
The majority of Iress’ earnings are currently sourced from Australia Pacific, however, a growing contribution is derived from the UK, Europe and North America.
Iress’ third-quarter update
For the third quarter (July to September), revenue was up 3% on the prior comparable period and net profit after tax (NPAT) was up just 0.7%.
For the year to date (YTD), operating revenue was up 8%, but net NPAT was down 9% on a constant currency basis.
Iress CEO Andrew Walsh commented that “pro forma numbers give appropriate insight into the Iress business”.
For the YTD, ‘segment profit’ on a constant currency pro-forma basis was up 6% on the prior comparable period to $113.3 million.
Iress defines segment profit as “earnings before interest, tax, depreciation, amortisation, share based payments, non-operating items and unrealised FX gains/losses”.
Essentially, it is a form of EBITDA after removing the impact of non-core business earnings, share-based payments, and the impact of foreign exchange movements.
Pro-forma numbers exclude the impact of currency gains, annual leave costs relating to COVID-19, acquisitions made in 2020 and assumes QuantHouse was owned for the entirety of 2019.
Recurring revenue
Recurring subscription revenue now accounts for more than 90% of Iress’ total revenue. This has allowed Iress to limit the financial impact of the COVID-19 pandemic.
Iress has a ‘sticky’ customer base, who by-and-large renew their subscriptions.
For example, Iress’ financial planning and wealth management software Xplan has more than 50% market share. Advisers would clearly prefer to spend time developing relationships with clients than on troubleshooting/switching advice software.
It would appear demand for Xplan is still growing, as more than 500 clients have been onboarded in the YTD.
Iress believes Xplan will continue to benefit from tailwinds including increased regulation, increasing business size and complexity, and the accelerating global shift to digital delivery of advice.
Are Iress shares undervalued?
Iress shares currently trade on a price/earnings ratio of 28.3. This appears expensive considering earnings per share (EPS) has grown at just 2.2% per year over the least 5 years according to Morningstar.
At a price/earnings ratio of 28.3, investors will likely be expecting double-digit EPS growth over the next 5 years. In the YTD, EPS vs. the prior comparable period was down 15%.
While I view Iress as a high-quality company, I do not view the current Iress share price as undervalued.
