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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: joachim.gunell@dnb.se