-Prospect of further acquisitions over 6-12 months
-High level of recurring revenue from parts & service<\/strong>
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By Eva Brocklehurst<\/p>\n
Automotive software specialist Infomedia ((IFM)) remains on track to record modest growth, after lockdowns and restrictions prevented sales from being converted to revenue and earnings in the first half.<\/p>\n
The slump in earnings heavily impacted the share price and brokers suggest this was undeserving as, understandably, the pandemic brought installations to a standstill. The company was also unable to fulfill new dealership licences in Europe and the US.<\/p>\n
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Bell Potter suspects the drop in the share price was framed by a weaker outlook for the second half than many had expected. Still, the broker believes the reaction was overdone as the business is performing well despite a challenging operating environment.<\/p>\n
Service revenue was up 9% in the first half while parts revenue was down -6%, contributing to an operating earnings (EBITDA) decline of -2%. Increased capitalised development costs caused a -16% decline in cash operating earnings.<\/p>\n
Nevertheless, over the medium term, management expects growth will be sustained and has an aspirational target for revenue of $200m by 2025<\/strong>. While restrictions are still affecting sale conversions this situation should now start to improve.<\/p>\n Credit Suisse points out the Next Gen platform continues to gain traction amid several small additional contracts. Major deals should add a sustainable 6-7% to revenue going forward, in addition to new opportunities, while the historically more difficult Americas could benefit from a leveraged sales model.<\/p>\n The broker believes it is time to revisit the stock, noting benefits of acquisitions will eventually materialise, and retains an Outperform rating with a $2.30 target. UBS, with a Buy rating and $2.10 target, incorporates reduced rolling out of licences in FY21 and a recovery in FY22.<\/p>\n UBS suspects the benefits from the subscription model will take a while to recover prior momentum. Nevertheless, the long-term outlook is unchanged and there is a strengthened product offering after the Next Gen platform is completed. The broker assesses this should deliver revenue growth that will translate to around 15-20% in terms of operating earnings.<\/p>\n Acquisitions<\/u><\/p>\n Bell Potter believes there is reasonable prospect of acquisitions over the next 6-12 months and assumes acquisitions worth $25m will materialise in each of FY22 and FY23, and be accretive to earnings. The balance sheet is net cash, although a capital raising during the last year is diluting forecast earnings per share. Still, Bell Potter expects double-digit growth in EPS in FY22 and FY23.<\/p>\n The broker re-evaluates its modelling and upgrades to Buy from Hold, retaining a target of $1.75, highlighting that all products are sold on subscription and as a result there is a high level of recurring revenue. The main risks to the business generally are the loss of license agreements and key customers along with product obsolescence.<\/p>\n Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n