DNB Markets: Hat-trick in 50%+ EBIT beats

The Q4 results marked the third consecutive ‘beat and raise quarter’ and in our view the SEK290m impairment marks the end of ‘old IAR’, after which we believe investors can look forward to a streamlined ‘new IAR’ where we forecast 31% adj. EBIT growth YOY for 2024e at a 25% ROCE (from the low teens in recent years) at 13x EV/EBIT. We further believe IAR is in its best shape operationally in the six years we have covered it, and have raised our fair value to SEK150–220 (140–210).

Third consecutive double-digit (53%) adj. EBIT beat to our forecast. Q4 organic sales growth was 15% YOY on broad-based strength (we expected 4% YOY), with all regions back in double-digit organic growth, recurring revenues up 21% YOY, and 12% upfront licences YOY set up net sales 9% above our forecast. IAR Embedded Workbench remains the anchor, while its C-tools series and functional safety products allow it to expand its customer share of wallet. The sales beat, 96.6% gross margin, cost savings and improved efficiency (net sales/employee up 15% YOY) translated in a 103% adj. EBIT drop-through, and 95% adj. EBIT growth YOY led to adj. EBIT 53% above our forecast (25.5% margin, up 10.3%-points YOY). 87% cash conversion (22% FCF margin) resulted in net cash of SEK146m at end-Q4 while IAR proposed a SEK1.5 DPS (flat YOY, 1.1% yield, and reiterated ambitions to continue with share buybacks).

2024–2025e adj. EBIT raised by 4–2%, despite 12–10% FX headwind as this marks the third consecutive beat and raise quarter and strong demand (easy comparables in H1), while the SEK50 full run-rate cost-savings allows for meaningful operating leverage. We forecast 9–31% YOY organic sales and adj. EBIT growth YOY for 2024.

Fair value raised to SEK150–220 (140–210) corresponding to a 2024e EV/EBIT of 15–23x. We like IAR's progress to becoming a platform business, having cleaned up its balance sheet, as well as: its profitable growth and solid net cash position (12% of its market cap 2024e), offering prospects of generous capital allocations and even bolt-on M&A; 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

Phone: +46 731435281
Email: [email protected]

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