Q2 short of expectations. Given the roughly flat top-line growth 2018-2021 (-4% CAGR in new license sales offset by 8% CAGR in support and maintenance licenses), Q2's -2% organic sales growth YOY fell short of our 5% estimate. Many customers' projects are still postponed and decision-making processes are delayed owing to the pandemic. However, the exclusion of SEK21m in sales to strategic customers (IAR Systems has started to periodise its 3-5-year contracts instead of recognising whole contracts upfront) and SEK-10m in FX effects YOY would result in sales growth of c20% YOY. With a 5% miss to our Q2e sales and lower-than-expected capitalised development costs, the adj. EBIT of SEK15m (17% margin, -42% YOY) was 30% below our estimate.
2021-2022e EPS lowered by c15%, as we have reduced our expectations for the ramp-up of Secure Thingz sales, which have underperformed our expectations for the past two years. We have kept the rest of our forecasts broadly unchanged; we lower our group sales forecasts by c6% but with 97% gross margins operating leverage becomes a headwind. We see IoT security standards as a key demand driver (i.e. Consumer IoT EN 303 645), but believe it will take time for legislative tailwinds to drive adoption. Although still representing a small base, we are encouraged by the ample traction for its 64-bit, RISC-V, and functional safety products, which showed 100%+ YOY growth in Q2.
Our SEK150-220 (180-250) fair value corresponds to a 2022e EV/EBIT of 19x and a P/E of 27x. We believe the market wants stronger signals that IAR Systems' negative two-year earnings-revisions trend has reached a turning point. We estimate that the legacy workbench business should be valued at cSEK140/share.
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Joachim Gunell | DNB Markets | Equity Research
DNB Bank ASA, Filial Sverige
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