DNB Markets - IAR Systems: Potential for share buy backs

The modernisation of IAR Systems continues in full force. Having laid off 11% of its employees, launched its new integrated safety, security, and compliance solution in Q2, and planned broader SaaS transformation. With a leaner cost structure into 2024e, we believe operating leverage could surprise on the upside. Given its net cash position (8% of its market cap) and decade-low valuation multiples, we see potential for it to utilise its share buyback mandate. We have raised our 2023–2024e adj. EBIT by 10–7%, and in turn our fair value to SEK130–200 (120–200).

Solid Q2 against low expectations. Q2 organic sales growth was -4% YOY (APAC and deferred revenues up 14% and 23% YOY, respectively, offset by declines of 13% in Europe and 14% in the US) in light of a tougher market and customer IT capex scrutiny, which led to net sales 3% above our forecast. Early positive signs from its SaaS offering test launch in the US during the quarter suggest a broader launch in EMEA and APAC in Q3. Adj. EBIT was 123% above our forecast (16.1% margin, down 2.1%-points YOY; including a SEK4.7m impairment of the 2011 Signum acquisition), corresponding to an 11% decline YOY. Cash flow from operations grew by 12% YOY, resulting in an LTM cash conversion of 96% and net cash of SEK95m at end-Q2.

2023–2024e net sales and adj. EBIT raised by 2–3% and 10–7%, respectively, mainly driven by positive FX and the Q2 beat, while also adjusting our organic growth assumptions. IAR Systems now targets SEK50m of annual cost savings at full run-rate for 2024 (~55% of its 5-year average adj. EBIT), allowing for ample operating leverage, with a 97% gross margin as organic growth accelerates.

Fair value raised to SEK130–200, corresponding to a 2024e EV/EBIT of 15–24x. 2023 looks set to be a tough year, but we like the combination of profitable growth, the solid net cash position (8% of its market cap, or 14% excluding IFRS 16 leases), defensive elements from c40% recurring revenues, and optionality from embedded security.

Best regards

Joachim Gunell | DNB Markets | Equity Research Sweden

Email: joachim.gunell@dnb.se

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