I.A.R Systems

Inspiring Q3, with adj. EBIT 65% above our forecast. Q3 organic sales growth was 6% YOY (we expected -4% YOY, split: deferred revenues up 11% YOY (-5% QOQ); flat upfront licences YOY; and recurring revenues up 24% YOY) on 17% organic growth YOY in the US (having repackaged its offering, targeting customers’ opex budgets instead of capex). The organic growth outperformance together with solid cost control and efficiencies (net sales/employee up 15% YOY) as well as improved drop through of 95%, led to adj. EBIT 65% above our forecast (28.2% margin, up 7.4%-points YOY). FCF conversion was 121% (from 100%+ in H1 2023) as FCF grew 19% YOY, resulting in net cash of SEK128m at end-Q3. IAR has utilised <1% of its buyback mandate and touted ambitions to make complementary bolt-on M&A (likely technology-related).
 

We have raised our 2023–2024e net sales raised by 4–2% and adj. EBIT by 29–13%, factoring in: 1) the second consecutive significant earnings beat; 2) deal-slippage into Q4; 3) increased confidence on cost-savings; and 4) negative FX (-3% on 2024e EBIT).
 

We have raised our fair value to SEK140–210, corresponding to a 2024e EV/EBIT of 14–22x. We like IAR’s progress to becoming a platform business, as well as: its profitable growth and solid net cash position (11% of its market cap, or 17% excluding IFRS16 leases), the latter offering prospects of generous capital allocations; 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

Email: joachim.gunell@dnb.se

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