Industry consolidation could go both ways for Iress
Closing share price 4-10-16: $12.050
52-week high: $12.580
52-week low: $8.730
Most recent dividend: 16c
Annual dividend yield: 3.54%
Another day, another acquisition for Iress. With the ink still drying on the INET BFA acquisition announcement, Iress is at it again with the $85m acquisition of Financial Synergy.
The acquisition does give Iress a strong platform in the superannuation market. Financial Synergy began life in 1978 as an actuarial firm, but after finding success internally developing software, it switched to providing software and services to superannuation funds and their administrators.
Its Acurity product helps superannuation members to view and manage their investments, as well as with reporting and compliance. It's now a significant business, managing 12.5% of Australia's $2 trillion superannuation industry (by assets). The acquisition adds $27.5m in revenue and $8m of EBITDA to Iress's coffers.
Financial Synergy seems like a very decent business. Since it started, it's yet to have a customer leave and 50% of revenue is recurring. Its 29% EBITDA margins trump Iress's, and that's using the lower EBITDA figure derived using Iress's more conservative accounting policies. It also didn't come at a bargain multiple with a price tag of 10.6x EBITDA.
Like any business, Financial Synergy has risks. The most notable is its customer concentration, with its top three customers contributing half of revenue. And like any acquisition, joining two organisations always brings integration and cultural risks.
That said, Iress is undoubtedly excited about the mandated growth of the superannuation industry, which is projected to grow to $9.5 trillion of assets by 2035. With such rapid growth in assets, it seems logical to assume that the superannuation administration software market will follow a similar trajectory, supporting Financial Synergy in turn. But in reality, growth is unlikely to be this certain or predictable.
For instance, industry structures tend towards oligopolies over time in Australia. We have four big banks, two large supermarkets, and after Vocus's roll-up of the sector, just a handful of telecoms providers. It seems likely that the superannuation industry will follow a similar path over time.
For Financial Synergy, the winds of industry consolidation could blow both ways. If its clients buy out competitors, it would be a big benefit as their acquired members are migrated onto Acurity. But if competitors do the consolidating, Acurity's customer numbers could stagnate.
At this stage, Financial Synergy looks like a decent acquisition, but we look forward to future presentations to learn more about it. In the meantime, HOLD.