Dealerships Fuel High Growth For Infomedia

This story features INFOMEDIA LIMITED. For more info SHARE ANALYSIS: IFM

-Subscription based model
-Strong earnings growth rate
-Is valuation justified?

By Eva Brocklehurst

Infomedia ((IFM)) is a well placed business, with products which can improve the efficiency of automotive parts procurement and identification worldwide. The company provides electronic information to the spare parts and servicing departments of car dealerships.

Canaccord Genuity initiates coverage with a Buy rating and $1.50 target. The broker believes Infomedia offers exposure to a solid earnings growth profile through an increasing subscriber base. The industry has high barriers to entry with most automotive manufacturers selling exclusive licences of their vehicle data. The parts and services departments typically generate 35-40% of a dealership’s profit. Canaccord Genuity observes this is a vital division, if often poorly run, and Infomedia has the capacity to improve this function.

The subscription based model means that 96% of revenues are recurring. The broker estimates 75-80% of operating costs are fixed, so incremental subscribers have potential to generate earnings growth. Analysis suggests 15% revenue growth would generate 35% earnings growth per share. While the valuation is not cheap – the stock is trading at a price/earnings ratio of 23.3 on FY16 forecasts – the broker considers it justified. The 5-year forecast for compound earnings growth of 19% could increase to over 30% if the company can accelerate top line growth to 15% from 10%.

What stands in the way? Subscriber growth can be difficult to foretell and timing is challenging. Canaccord Genuity accepts Infomedia may have periods when growth is more subdued. Still, the company is net cash, has strong returns and a reasonable dividend yield of 3.9% on FY16 forecasts. All very positive, in the broker’s view. Morgans also considers the company’s outlook is positive, citing a number of pilot programs being developed which should generate increased revenue in the current half year. Morgans has an Add rating and $1.30 target.

Longer term, the growth trajectory is likely to come from rapid changes in technology and increasing wealth in developing countries. The latter represented 20% of Infomedia’s revenue in FY14 but these countries generate 42% of global new car sales. Technological changes are being reflected in the rising recognition of the value of out sourcing systems. Canaccord Genuity estimates that nearly 40% of the addressable market for Infomedia is currently in house and this model is becoming less feasible for dealerships. Any downside would involve the company failing to keep abreast of technology or maintaining its competitive advantage, and failing to capture the growth inherent in developing markets.

The broker is forecasting FY15 profit growth of 12%, broadly in line with guidance for over $13.7m. Infomedia’s core product is its electronic parts catalogue which identifies the spare parts required from a car’s VIN, or vehicle identification number, while accessing an extensive cloud-based database. The company is also rolling out a suite of modules which focus on diagnostics, servicing and repairs that is integrated to the parts system, providing dealers with the tools to improve customer sales and service.

The company has a global customer base in excess of 19,000 dealers and 160,000 users across 186 countries. Offices are located in Sydney and Melbourne in Australia, Detroit in the US, and Cambridge in the UK.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms