DNB Markets - IAR Systems: Back to business

IAR Systems’ ability to sign one of its largest-ever deal during a global pandemic demonstrates: 1) solid execution; 2) the relative resilience of its business model; and 3) that its offerings are mission-critical for clients, with large OEMs increasingly standardising using its development tools. Underlying, we have raised our 2021–2022e EPS by 12%, although this is more than offset by a 16% FX headwind. We have also raised our fair value to SEK180–250 (SEK150–230).

Strategic customers drive Q2 beat. Sales were SEK100m (15% above our forecast), corresponding to -1% organic growth (we expected -16%), providing testament to the company’s resilience, as large strategic OEM customers have maintained their design activity despite Covid-19. We are encouraged that security sales ramped up slightly in Q2 for the first time, which we will continue to monitor in H2. EBIT of SEK25m (25% margin) beat our forecast by 46%, suggesting tight cost control, although capitalised development costs boosted EBIT by SEK20m. FCF of SEK21m impressed (up 103% YOY), as FCF generation has historically been a hallmark.

Outlook comments. While OEM customers are unlikely to halt design projects, management said it expects some delays to client upgrades in its transactional model (~80% of sales), while the CEO indicated strong uptake going into Q3. Industry groups and government agencies are increasingly building legislative frameworks (most recently ETSI’s consumer IoT standard) to integrate device security and help OEMs protect IPs and prevent overproduction. This ensures only secure and signed code can run on their devices, acting as a tailwind for adoption of IAR System’ security solutions, in our view.

FX means we have cut our 2021–2022e EBIT by 4%, with 12% increases more than offset by a 16% FX headwind from a stronger SEK.

Our fair value of SEK180–250 corresponds to a 2022e EV/EBIT of 19x and P/E of 26x (a 10% discount to its historical average). We believe reignited growth from new product launches needs to fuel a change in sentiment towards the company to re-establish its credentials as a growth story before IAR Systems can realise its full valuation potential.

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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