DNB Markets - IAR Systems: Multiples compression post-results

The Q3 results marked the second consecutive ‘clean beat and raise’, where multiples has compressed as we have increased our 2023–2024e adj. EBIT by 29–13%, while the stock gained 18% today. Although small-caps generally remain out of favour, we believe IAR is in the best shape operationally in the six years we have covered it. Having trimmed the cost base, we expect 42% growth in EBIT YOY in 2024 via self-help measures, while buybacks should counter its decade-low multiples. We have raised our fair value to SEK140–210 (130–210).

Inspiring Q3, with adj. EBIT 65% above our forecast. Q3 organic sales growth was 6% YOY (we expected -4% YOY, split: deferred revenues up 11% YOY (-5% QOQ); flat upfront licences YOY; and recurring revenues up 24% YOY) on 17% organic growth YOY in the US (having repackaged its offering, targeting customers’ opex budgets instead of capex). The organic growth outperformance together with solid cost control and efficiencies (net sales/employee up 15% YOY) as well as improved drop through of 95%, led to adj. EBIT 65% above our forecast (28.2% margin, up 7.4%-points YOY). FCF conversion was 121% (from 100%+ in H1 2023) as FCF grew 19% YOY, resulting in net cash of SEK128m at end-Q3. IAR has utilised <1% of its buyback mandate and touted ambitions to make complementary bolt-on M&A (likely technology-related).
 

We have raised our 2023–2024e net sales raised by 4–2% and adj. EBIT by 29–13%, factoring in: 1) the second consecutive significant earnings beat; 2) deal-slippage into Q4; 3) increased confidence on cost-savings; and 4) negative FX (-3% on 2024e EBIT).
 

We have raised our fair value to SEK140–210, corresponding to a 2024e EV/EBIT of 14–22x. We like IAR’s progress to becoming a platform business, as well as: its profitable growth and solid net cash position (11% of its market cap, or 17% excluding IFRS16 leases), the latter offering prospects of generous capital allocations; the defensive qualities of c45% of revenues being recurring; the optionality in embedded security, RISC-V; and the ambition to expand its embedded systems market.
 

Best regards

Joachim Gunell | DNB Markets | Equity Research Sweden

Email: joachim.gunell@dnb.se

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