Australia | Jun 03 2020
This story features IRESS LIMITED. For more info SHARE ANALYSIS: IRE
Iress has taken the opportunity to raise capital to more than provide for its purchase of OneVue Holdings, targeting scale in superannuation and funds management solutions.
-Excess capital raised provides room for more acquisitions
-Acquisition highly dilutive for the short term
-Iress on track for revenue growth in 2020
By Eva Brocklehurst
The acquisition of OneVue Holdings ((OVH)) by Iress ((IRE)) continues the latter's history of acquiring small complementary businesses. The plan is to fully integrate the OneVue investment solutions with the Iress Acurity superannuation business.
Iress will raise $170m, well in excess of the $115m acquisition price. Credit Suisse notes scale in funds administration and platform services will be provided, and to a lesser extent additional superannuation administration capability.
While OneVue revenue makes only a small contribution to Iress, the market is large and the earnings being generated from competitors suggests there is a medium-term opportunity that is significant.
Still, Credit Suisse questions an equity raising of such size to acquire a business that is only roughly breaking even, as it indicates an initial dilution of around 10% pre-synergies. OneVue is loss-making under the Iress accounting approach but Morgans suspects the extra amount provides room for more acquisitions.
The company has defended its capital raising as "conservative" expecting it to strengthen the balance sheet and support the investment of $7m to integrate the business during the first two years.
Iress pointed out it did contemplate using debt finance for the purchase but decided, in view of the current market volatility, it would be more prudent to raise capital now. The revenue opportunity was the main attraction rather than cost reductions from synergies.
Brokers are somewhat dubious about the benefits in the short term but accept that longer term the combination of scale in technology will provide exposure to large revenue streams.
Longer term, if merger synergies can be achieved, then Iress should have a strong low-cost administration platform that others will struggle to match, Morgans assesses. Still, revenue and earnings of OneVue are not included in the broker's forecasts and the combined businesses would need to win several substantial new clients in order to be accretive before 2025.
Meanwhile, Iress' profit is tracking a little behind forecasts although revenue is ahead, which Credit Suisse "gladly" accepts in the current market environment as, given this is a year when many companies will be presenting drab results in August, revenue growth is welcome.
The Asia-Pacific business is sound, the broker adds, with an emerging superannuation administration opportunity, while the UK remains well-positioned for consolidation. Ord Minnett eases back to an Accumulate rating from Buy, agreeing that in the short term this acquisition will be dilutive but provide longer term potential.
The proposed acquisition is via a scheme of arrangement with an all-in cash offer of $0.40 a share, at a 67% premium to the last closing share price. In FY19 OneVue reported an adjusted operating loss of -$500,000.
The capital raising comprises a fully underwritten share placement for $150m at $10.42 a share and a share purchase plan up to $20m. The purchase remains subject to regulatory approvals but competition is plentiful and Morgans remains unaware of grounds whereby regulators would reject the deal.
In the event Iress does not win control of OneVue it will be over capitalised temporarily but, the broker suggests, should either be able to buy other complementary businesses or, failing that, buy back shares.
Morgans also highlights that acquisitions by Iress in the past have not appeared logical at first but the majority have delivered "decent" returns on the investment in the long run.
FNArena's database has two Buy ratings, one Hold (Credit Suisse) and one Sell (Macquarie). The consensus target is $12.15, suggesting 4.4% upside to the last share price.
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