The share price of financial services business Iress Ltd (ASX:IRE) has continued its post reporting season drop, currently trading at $9.92 after making new 52 week lows of $9.81 in yesterday's trading session. The company has now lost 14.41% since the release of its full year earnings for 2017 on February 21 and is trading at levels not seen since February 2016.
Costs blowout
Group revenue in 2017 increased by 10% to $430 million (up 13% at constant currency) over the prior corresponding period driven by a combination of organic growth and the acquisitions of Financial Synergy and INET BFA. Despite the boost in revenues, an increase in product technology, operations and corporate costs saw segment profit only rise by 2% to $125 million (up 3% at constant currency). Contribution margins were down from 32% to 29% which reflected the lower margins of the acquired businesses and one-off project delivery costs.
Management attributed the rise in expenses to the recently acquired businesses, increased recruitment and higher wages. Excluding the contribution from the 2016 acquisitions, revenue growth was 4% and segment profit fell by 3% due to targeted investment in client delivery capability aimed for the long term.
As a consequence of the increase in costs, net profit increased by 1% to around $60 million. However, earnings per share fell 4% to 35.4 cents because of an increase in the number of ordinary shares issued during the year.
Foolish takeaway
Management's guidance for 2018 is for segment profit to grow within the 3-7% range on a constant currency basis, with growth weighted towards the second half. The guidance provided was below market expectations and the stock has consequently sold off. The market has priced Iress at a premium relative to the general market to reflect the underlying quality of the business. The underwhelming 2017 result and outlook for 2018 has seen the stock derate with its multiple declining to a more compelling valuation.
At current prices, investors can expect to pay around 23 times projected forward earnings for 2018. Sentiment surrounding the stock remains bearish and short interest has increased over the last several months to 4.67%. I think there is still room for further multiple contraction without a near term bullish catalyst for the stock. Investors might want to consider other companies operating in the fintech space such as Praemium Ltd (ASX:PPS) and Afterpay Touch Group Ltd (ASX:APT).
