DNB Markets - IAR Systems: Sensing improvements

Despite its exposure to high-growth megatrends, such as IoT and cybersecurity, overall revenue growth for IAR Systems’ programming tools has been low. We believe the Q1 report signalled that the worst is in the past and that the measures taken by its new leadership are leading to a gradual turnaround in its growth trajectory. We have raised our 2023e adj. EBIT by 2%, and reiterate our fair value of SEK130–220/share which corresponds to a 2023e EV/EBIT of 13-25x.

Key points of Q1 report. Net sales of SEK97m (2% above our estimate) set up organic growth of 3% YOY (our estimate: 2%), although underlying organic growth was 6% YOY after adjusting for multi-year contracts. Its key growth driver is its support and maintenance licences (priced at ~20% of a new licence). The adj. EBIT of SEK16m (16.8% margin) was 14% below our forecast, which we mainly attribute to lower capitalised development costs, which we find positive (maintaining a similar rate of capitalisation YOY would have corresponded to an EBIT of SEK25m). This meant FCF conversion of 94% was above our expectation.

2022e adj. EBIT lowered by 7%, but 2023e raised by 2%, to reflect lower capitalised development costs, although we have raised our net sales forecasts by 3–2% for 2022–2023, as we are cautiously optimistic about price-hike plans and commercial momentum for its security and RISC-V offerings. IAR Systems' aim is to accelerate organic growth to 10%+ YOY in 2022 (our forecast: 9%). With a 97% gross margin, we expect its profits to grow even faster.

SEK130–220/share fair value reiterated, which corresponds to a 2023e EV/EBIT of 13-25x. We believe the worst is over and are encouraged by the new management team's swift actions to accelerate growth (e.g. new organisation, new revenue models and licence systems, shifted compensation models for sales employees), although it will probably take a few quarters to complete the turnaround. We see additional potential growth if its RISC-V or security offering experience a commercial breakthrough, which is not reflected in our fair value.


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