DNB Markets - IAR Systems: Sensing improvements

Q1 marked the first quarter in two years with organic sales growth YOY. Alongside gradually normalising customer behaviour throughout 2021, three new milestone product launches and a beefed-up board of directors, we believe this should spark a shift in perception, given the vast potential market opportunity to reignite ~15% organic sales CAGR and revisit 30%+ EBIT margins. We reiterate our SEK180–250 fair value, which corresponds to a 2022e P/E of 27x.

Q1 takeaways. Organic sales growth of 6% YOY (our estimate: 5%) marks the first quarter in the past seven with positive organic growth YOY, as all regions showed organic growth. We also note solid traction for its recently launched 64-bit offering and RISC-V products in China (showing 200%+ YOY growth), albeit from a low base. An EBIT margin of 19.1% (-3.7% excluding capitalised development costs) meant Q1 EBIT of SEK17m came in 4% below our forecast.

2021–2022e EPS cut by 2%, to reflect FX headwinds and pandemic-related longer sales cycles also affecting Q2–Q3e. We now forecast 15% organic sales growth YOY in 2021, leading to a 26.3% EBIT margin and 32% EPS growth YOY, primarily related to support and update sales in Q2–Q3e, with new product launches in RISC-V, 64-bit and security boosting Q3–Q4e sales as its customers commit to new projects.

First glimpse of new revenue model. Via its security offering, IAR Systems is set to introduce a profitable royalty model where it will earn ‘a few cents on the dollar’ for each chip programmed and updated via its security offering, which we believe should substantially extend its addressable market opportunity in the years to come.

Our SEK180–250 fair value corresponds to a 2022e EV/EBIT of 19x and P/E of 27x. We note the stock is trading 30% below its historical average and 60% below the software universe. We expect an inflection in new technology adoption in 2021 – 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 we believe could accelerate.

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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