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Rejuvenated IAR continues to show that it can execute at a higher level with `rule of 40' credentials in H2e, accelerating organic growth, and rolling 12-month adj. EBIT margins back at five-year highs. We are positive on its SaaS offering launch in H2e, but believe there may be some short-term bumps, with a new CEO and a slowdown in earnings momentum as YOY comparables get tougher, which raises the bar to exceed expectations. We have lowered fair value to SEK160-240 (170-240).
Q2 organic growth of 16% YOY was the highest in 12 years (we expected 12%), with 16-11% growth YOY in perpetual and recurring revenues, respectively, where the strong growth momentum in Europe continued (+26% organic YOY), benefiting from IAR's multi-year enterprise deals focus. A 98% gross margin, cost savings and improved efficiency (net sales/employee up 18% YOY) translated into 87% adj. EBIT drop-through, which led to adj. EBIT 3% below our forecast (24.2% margin, up 8.1%-points YOY). 79% cash conversion (19.2% FCF margin) resulted in net cash of SEK114m at end-Q2 and IAR has completed share buybacks worth SEK61m since Q3 2023.
2024-2025e adj. EBIT lowered by 7% respectively, to factor in 1) IAR's high FX sensitivity to SEK appreciation, explaining -5 and -9%, respectively; and 2) our underlying estimates are fairly unchanged on 2024-2025e (-2% to +2%), reflecting higher organic growth assumptions, partly burdened by higher opex. We expect to see 1% adj. EBIT growth YOY in H2e versus 110% YOY in H1.
Fair value lowered to SEK160-240, corresponding to a 2024e EV/EBIT of 15-24x. We like IAR's progress to become a platform business, having cleaned up its balance sheet, as well as: its profitable growth and solid adj. net cash position (10% of its market cap, 2024e), offering prospects of solid capital allocations and even bolt-on M&A; the defensive qualities of c50% 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