DNB Markets - IAR Systems: fair value cut to SEK120-200

Amid 1) a hiccup in its turnaround; 2) a shift in the investor base; and 3) low liquidity in the shares, IAR Systems’ share price is back at 2015 levels. We have educed our 2023–2024e EPS by 33–20% to factor in slower organic growth (with high drop-through). Although 2023 seems to be a difficult year, we appreciate the combination of profitable growth, being net cash positive, defensive elements from c40% recurring revenues, and optionality from its embedded security offering. We note insiders have accumulated shares above current share-price levels recently. We have lowered our fair value to SEK120–200 (140–250).

Q2 preview. We expect Q2 organic net sales growth of -8% YOY, hurt by a tough YOY comparable, with extended perpetual licence sales cycles amid customer capex scrutiny offset by resilience in support-and-update sales (deferred revenues have grown 25–30% YOY in recent quarters), leading to sales of SEK105m. We forecast a 7.4% adj. EBIT margin (down 10.8%-points YOY), corresponding to a 'rule of 40' of 5.1%. IAR Systems recently announced a cost-savings programme targeting SEK27m in annual savings (aiming for a full run-rate by end-Q3 by reducing the group headcount by c11% in relation to its embedded security offering). Combined with softer IT spending and its ambition to pilot a SaaS offering in North America, we now forecast -2% YOY organic revenue growth in 2023. The Q2 results are due on 16 August.

2023–2024e net sales reduced by 8–9% and EPS by 33–20%, to reflect a reset of embedded security forecasts, while we have lowered our organic growth assumptions for development tools given extended sales cycles for its licence-based revenues (~40% of group revenues). Given its 97% gross margin, such net sales changes have a high drop-through on EPS, offset by our lowered opex assumptions for 2024 (SEK19m versus its SEK27m targeted savings).

Fair value lowered to SEK120–200, corresponding to 2024e EV/EBIT of 15–26x.