DNB Markets - IAR Systems: Closer to end of investment phase
We remain confident IAR’s substantial investments in IoT security and RISC-V should accelerate sales growth, as these markets are seemingly ramping up worldwide (albeit from a low base). We expect proof of this in 2020e to contribute to a share price re-rating but we have lowered our fair value to SEK230–275 (250–300), after cutting our 2020–2021e EBIT by 5%.
Q4 EBIT 6% below our forecast, with organic sales growth of -1% (our estimate 0%) as major transactions remained lumpy while a protracted consolidation of chip vendors keeps hampering industry growth. Although CEO Stefan Skarin mentioned growing and considerable interest in new product launches, they have yet not resulted in meaningful sales given their recency. Opex growth of 5% and higher amortisation of intangible assets meant the EBIT margin was 25.4% (down 4.9%-points YOY) with a boost from capitalisation of development costs of SEK23m. A DPS of SEK3.00 (down 40% YOY) was proposed for 2019, owing to lower tax-loss carry-forwards and higher investments, which we consider should have been cut already in 2018.
Synergy back from the cold. We like that IAR has renegotiated terms for the Renesas Synergy agreement, whereby IAR will take responsibility for migrating ~5,000 active users to its licence model in 2020 (we identify SEK30m–50m sales potential).
2020–2021e EBIT cut by 5%, reflecting 1) the slower ramp-up of security tools (we forecast sales of SEK25m in 2020e); and 2) the Renesas Royalty agreement being replaced by perpetual licence sales.
Fair value lowered to SEK230–275 (250–300) to reflect our updated forecasts, on which IAR is trading at a 2020e P/E of 24x, corresponding to a ~20% discount to its historical average, while we estimate that IAR’s legacy business should be valued at a minimum of SEK160/share, providing some sort of indicative floor for the share price. While we are in the early stages of IoT security and RISC-V, we continue to believe that IAR Systems is well positioned to benefit from secular tailwinds for its industry-leading tool portfolio and expect the growth rates to accelerate to double-digits from 2020, providing building blocks to take its investment case to the next level.
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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