DNB Markets - IAR Systems: "Next year is IAR Systems' year"...

… is something we have been saying since 2019 and, while the burden of proof is heavy, we remain confident that the investment community should see early signs of 64-bit, RISC-V, and security traction in 2021e. This could spark a shift in perception given the vast market opportunity to reignite a ~15% organic sales CAGR and revisit 30%+ EBIT margins. Our SEK180–250 fair value corresponds to a 2022e P/E of 27x.

Q4 takeaways. An organic sales decline of 11% YOY (our estimate: -8%) as, while existing clients continue to buy support and maintenance licences, new business wins are weak as customers postpone investment decisions. Although we see less pumped-up EBIT from capitalised development costs, EBIT missed our forecast by 15%, implying a 20.9% margin. FCF rose 35% YOY (11% margin), signalling IAR is past the peak of its 3-year SEK350m+ investment phase. We have lowered our 2021–2022e EPS by 5% to reflect an uncertain demand backdrop in H1 2021e.

2021 set to be a breakout year for RISC-V. The RISC-V ecosystem is maturing (RISC-V foundation members have expanded fivefold since IAR Systems joined in 2018), setting the tone for a potential breakout 2021e. Semico and Tractica forecast a ~100% CAGR of RISC-V cores reaching 62bn units in 2025e and a ~USD20m RISC-V tools market for a 40%+ CAGR to 2025e, where IAR should gain a sizeable share.

We see potential tailwinds for Secure Thingz in 2021 from: 1) growing C-level awareness of the need for code security, and IAR Systems can seamlessly implement foundational security in every design; 2) IoT security legislation that requires identity to be built into products; and 3) high-profile security hacks and large data breach fines.

Our SEK180–250 fair value corresponds to a 2022e EV/EBIT of 19x and P/E of 27x. We still estimate the legacy workbench business should be valued at ~SEK160/share and see a valuation gap versus its historical average and the software universe (~40% and ~60% below, respectively). In 2021, we expect an inflection in the adoption of new technology (where IAR was an early mover, in 2018–2019) to lead to a 25%+ EPS CAGR to 2023e with a long runway for growth that could accelerate.

 

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Best regards 

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Joachim Gunell | DNB Markets | Equity Research

DNB Bank ASA, Filial Sverige
Visiting address: Regeringsgatan 59, Stockholm
Postal address: 105 88 Stockholm
E-mail: joachim.gunell@dnb.se | www.dnb.no