DNB Markets - IAR Systems: Closing in on new inflection points
Slight launch delays mean new products have not offset soft organic growth in recent quarters. We expect the organic sales growth acceleration in 2020e to reverse the weak share-price trend and demonstrate IAR’s leading position ahead of the two hottest emerging structural growth verticals in the embedded industry. We reiterate our fair value of SEK250–300.
Q4 preview (due at 13:00 CET on 11 February). We forecast sales growth of 5% in Q4 – 0% organic growth supported by FX adding 5%. We forecast SEK29m in Q4 EBIT (-7% growth YOY), corresponding to a 26.8% adj. EBIT margin. Our expectations of flat organic growth reflect a tougher comparison base for its legacy programming tools given softer end-markets and consolidation of chip vendors (affecting the number of licenses sold). We see an inflection point for new products (security and more notably short-term for RISC-V) driving growth in Q2 2020e, with an acceleration into H2, and believe IAR Systems will keep its 2019e SEK5.00 dividend flat.
FX lowering 2020–2021e EBIT by 4% as IAR is very sensitive to SEK strengthening, while we believe the ramp-up of security products could be delayed into H2 2020e as they were launched commercially in Q4 2019 for mainstream chips. We see security sales reaching SEK41m in 2020e (comprising ~9% of group sales), driven by IAR Systems’ extended security offering for mainstream device support, which should provide a faster ramp-up for OEMs to meet IoT security legislation requirements; however, quarterly visibility remains low. For instance, the California Consumer Privacy Act (CCPA) and Oregon’s House Bill 2395 went into effect on 1 January 2020, meaning that it is time to add security into the design phase for IoT devices.
Fair value of SEK250–300 maintained and 2020e P/E of 25x seems undemanding in our view, corresponding to a 15% discount to its historical average, while we estimate that IAR’s legacy business should be valued at a minimum of SEK170/share, providing some sort of indicative floor for the share price, in our view. 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 its product launches in two of the hottest themes in the embedded industry and expect the growth rates to accelerate to double-digits from 2020e onwards, providing building blocks to take its case to the next level.