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IAR Systems Group AB: DNB Markets - IAR Systems: Winds of change

IAR Systems is trading at a 2022e EV/EBIT of 12x. Although the recent CEO dismissal could cloud short-term operational momentum, we believe it could signal a turning point in IAR Systems' two-year uphill climb. Having reset our forecasts for Secure Thingz, we have cut our fair value to SEK130-220 (150-220) and expect IAR to report 19% organic sales growth YOY in 2022e.

What we learnt from Q3: 1) on our numbers, IAR reported 17% underlying organic growth in Q3 YOY (adjusted for revenue recognition of strategic customers); 2) IAR will review its licence model and we do not rule out an eventual SaaS transformation; and 3) acting CEO Richard Lind gave a good first impression but revealed no strategic news.

2022-2023e EPS reduced by 21-17%, as: 1) our Embedded Workbench forecasts are broadly unchanged, but 2) we have cut our sales expectations for Secure Thingz for 2022-2023e by 80%, which has thus lowered our group sales forecasts by 8%, which, at a 97% gross margin, has had a material effect on our EPS estimates. The board's CEO dismissal signals an ambition to accelerate and improve the sales organisation, which to us suggests that near-term traction is still a few quarters out while a new CEO implements the changes needed. The medium-term embedded security market opportunity with an `out of the box' solution for mainstream MCUs remains lucrative for IAR, but it will probably take time before IoT device security regulation and standards really affect the marketplace, in our view.

Fair value cut to SEK130-220 (150-220), to reflect our estimate changes, corresponding to a 2022e EV/EBIT of 22x. We estimate that the legacy workbench business should be valued at cSEK130/share and as we get more signals that IAR Systems has reached a turning point of its negative two-year earnings-revisions trend, perceptions of the company may change. On the downside, it could take a few quarters before a new CEO can accelerate IAR's growth strategy and with new eyes on its ~SEK400m investments in IoT security, there could be impairment risks.

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Best regards 


Joachim Gunell | DNB Markets | Equity Research
DNB Bank ASA, Filial Sverige
Visiting address: Regeringsgatan 59, Stockholm
Postal address: 105 88 Stockholm

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