IAR Systems is riding the wave of IoT. The phenomena known as Internet of Things is one of the key drivers in the case of IAR. Traditional appliances  requires digital upgrades and need embedded system to function. IAR with over 50% of the market share are aligned to meet this expected growth in costumer demand.

Scalable business model set to drive margin improvements. With large fixed costs which mostly consist of compensation for engineers, ~46% of sales. According to the company 70-80% of old codes can be re-used, developing new software products. Therefore, EBIT margin is expected to grow from 30% in Q4 2018 to 35,5% in 2021E. Cash conversion have been strong historically and expects to continue due to IAR’s asset light business model.

Low financial risk with a net cash position and positive cash flow. IAR’s recurring customer rate of 95% have lead to stable revenue streams and predictable cash flow. IAR is operating in a very profitable industry and accumulated a strong financial position financed almost entirely with equity.

DCF valuation indicates 5% downside. Discounting expected FCF with a WACC of 8.76% implies target price of 247 SEK per share, which is 5% below current trading price. Taking into account current multiples for 2019E of a P/E 33 and an EV/ EBIT of 25 expectations is relatively high and room for failures is small.

Analysts: Carl Fredrik Falkner & Viktor Karlsson

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