Is Iris an investment opportunity?

Value Investing Case Study 86-1: Is Iris Corporation Berhad a hidden gem of the identity verification market? Discover its turnaround story and upside potential.   

Iris Corporation Berhad (Iris or the Group) has evolved into a prominent player in the global identity verification industry. The company pioneered advancements in trusted identification, including developing the world’s first e-passport and multi-application e-ID card. 

Today, Iris operates in 34 countries, serving governments and enterprises with cutting-edge technologies. The company’s transformation over the past decade underscores its ability to adapt to changing market dynamics. 

By divesting non-core businesses and focusing on its trusted ID segment, it has refined its business model. Despite challenges, the company has demonstrated resilience through improved financial performance and operational efficiencies.

Join me as I delve into Iris's journey. This case study explores Iris's transformation, highlighting key factors that investors analyze when assessing turnaround stocks. By reviewing its financials, industry position, and valuation considerations, this study provides insights into how businesses evolve in competitive markets.

Should you go and buy it? Well, read my Disclaimer. 

Contents

• Background

• Operating performance

• Financial position

• Valuation

• Conclusion

• Incorporating Iris into a Financial Plan

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Background

In 2024, Iris described itself as a focused global leader in trusted identification solutions, emphasizing secure, innovative technologies for governments and enterprises. 

The company has changed significantly over the past decade. In 2015, it was focused on delivering integrated solutions across multiple industries such as technology, infrastructure, education, and sustainable development. 

The company has refined its operations over the years to establish itself as a key player in secure identity management. Key changes included:

• Shift in core business. The Group divested of non-core businesses such as the Education Division and other loss-making ventures.

• Introduction of new technologies.  Iris expanded its portfolio with solutions like biometric systems, and digital ID platforms to align with global trends in secure identity management.

• Global expansion. The Group continued its global projects in Africa, Asia, and North America. 

Today it reports its performance under 2 business segments. 

• Trusted identification. This segment focuses on providing secure, innovative, and end-to-end solutions for identity management. The offerings cater to governments and enterprises worldwide. The products include e-passports, e-gates, and kiosks for automated border control and vehicle registration systems.

• Sustainable development segment focused on niche projects that align with environmentally and socially responsible initiatives. Projects here included the development of waste-to-energy and waste-to-fertilizer plants.

The Sustainable development segment has only a minor revenue contribution to the Group. Over the past 5 years, it accounted for less than 3% of the Group’s revenue.

The Group has a strong global revenue source. Over the past 5 years, on average:

• Malaysia accounted for about ¼ of the Group’s revenue.

• Africa accounted for about 61 % of the Group’s revenue. 

Iris may be seen as a Malaysian tech company, but it has only a small presence in the 2 leading tech countries – the US and China. 

Market characteristics

I would classify Iris as in the identity verification industry. This is a double-digit growth global industry as exemplified by the following:

“The global identity verification market size was valued at USD 10.45 billion in 2023 and is projected to grow from USD 11.97 billion in 2024 to USD 39.82 billion by 2032, exhibiting a CAGR of 16.2% during the forecast period. North America region dominated the identity verification market with a market share of 32.25% in 2023.” Fortune Business Insights

“The global identity verification market size was estimated at USD 9.87 billion in 2022 and is expected to grow at a CAGR of 16.7% from 2023 to 2030.” Grand View Research

The other characteristic of Iris is that it derives revenue from project-based activities. The company's revenue comes from electronic identification cards, e-passports, and associated trusted ID solutions for specific overseas and domestic projects.

These projects include long-term contracts and government engagements in countries such as Nigeria, Senegal, and Guinea. There are also contracts for driving license ID cards and loyalty/payment cards. These suggest that a significant portion of the Group’s revenue is tied to specific projects and their successful completion. 

Note that the company had March as its financial year-end. In this article, unless specified otherwise, the years refer to the financial year. Secondly, the 2025 performance was based on the LTM Sep 2024 results.

Operating performance

There was a general decline in revenue over the past 12 years. Refer to the left part of Chart 1. But the revenue decline seems to have reached the bottom in 2021 with a recovery in 2022.

The declining revenue from 2014 to 2021 was a result of strategic realignment, market challenges, and the global pandemic. However, from 2021 to 2024, Iris successfully reversed the trend by focusing on its core trusted ID business, capitalizing on market recovery, and leveraging its technological edge. 

On the other hand, profits were relatively more stable with some improving trend over the past 12 years. 

Note that the steep loss in 2017 was due to “a one-time non-cash impairment of RM 247.1 million resulting from its corporate restricting programme. The impairment included goodwill and assets of RM143.5 million from non-core Sustainable Development and Education divisions.”

Chart 1: Performance Index and Returns

Given the change in its business, it is more appropriate to look at the performance post-2020. In this context, the return analysis showed that Iris did not create shareholders’ value. This was because the average returns from 2021 to 2025 were 8% for the ROIC and 4% for the ROE. These were lower than the current cost of funds.

But it is not all gloomy. Looking at the left part of Chart 2 you can see that the gross profit margin has been on an uptrend post-2020. Furthermore, the Selling, General, and Administration (SGA) margin has also been declining post-2020.

This is reflected in the uptrend in the contribution margin as shown in the right part of Chart 2. The other significant point is that the fixed costs post-2020 is very much smaller than those pre-2020. Note that the fixed cost in 2017 was unusually large because some of the restructuring costs were captured here. 

Chart 2: Margins and Operating Profit

Note to Op Profit. I broke down the operating profits into fixed costs and variable costs.

• Fixed cost = SGA, Depreciation & Amortization and Others.
• Variable cost = Cost of Sales that excluded Depreciation & Amortization.
• Contribution = Revenue – Variable Cost.
• Contribution margin = Contribution/Revenue.

I wanted to see whether these improving margins and lower costs were reflected by better operating and capital efficiencies. Chart 3 shows the trends of several operating and capital efficiency metrics.

• The overall operating efficiency seems to be improving post-2020. This is supported by better cost management, inventory handling, and asset utilization.

• Capital efficiency also seems to be improving post-2020. This is reflected by better resource allocation, improved cash flow, and stronger asset utilization.

Chart 3: Efficiency

Peer comparison

I compared Iris's performance with some of Bursa's tech companies. 

• Datasonic is a security-based information and communications technology solutions provider, specializing in secure identification and personalisation solutions.

• My E.G. Services specializes in electronic government solutions and related commercial services. It also serves as a digital bridge between the Malaysian government, businesses, and citizens, facilitating online access to a wide array of services.

• Willowglen MSC is a comprehensive provider of advanced monitoring and control systems. It leverages its extensive experience and technical expertise to deliver customized solutions across multiple industries and regions.

You can see that Iris's 2024 revenue is lower than the panel (including Iris) average. Iris also had the lowest revenue growth rate. 

Table 1: Peer revenue

I looked at the trends of 4 metrics to get a sense of how well Iris performed compared to its peers. Refer to Charts 4 and 5. 

Iris's performance suggests challenges in profitability, operational efficiency, and overall financial health. 

• Iris started with the lowest ROC. While its ROC has improved over the past few years, it is lower than average. 

• It had the worst EBIT margin for most of the time.

• I would rate Iris's levered Free Cash Flow margin performance as average.

• While having the best EPS initially, it became the worst before recovering. 

Chart 4: Bursa Peer Return on Capital and EBIT Margin

Chart 5: Bursa Peer Levered Free Cash Flow Margin and EPS

Case Notes Iris is a good example of why it is important to understand the nature of a company’s revenue. A company's revenue could come primarily from project-based activities or non-project-based activities. This distinction has significant implications for various aspects of the company's operations and financial performance as it affects: Revenue predictability and stability. Revenue from project-based activities tends to be irregular. Risk management. Companies relying on project-based revenue are more exposed to risks such as delays, cancellations, or client default. Cash flow management. Payment schedules tied to milestones or project completion can lead to irregular cash flows, potentially causing liquidity challenges during lean periods. There may be spurts of revenue growth that are often tied to winning larger or more frequent contracts.  Operational efficiency and resource allocation. Project-based revenue requires high operational flexibility to meet varying project demands. As you can see, there are many issues to consider when looking at revenue. You need to carry out a fundamental analysis to flesh out the nuances. This requires expertise and time.  Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format. You can see the position of Iris as of 13 Jan 2025 in the Fundamental Mapper chart below. Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies   PS: The Fundamental Mapper gives you a first-cut picture. For a company in the Turnaround quadrant, it is not an obvious investment choice. In my detailed valuation of Iris, I have shown that it has fundamental strengths and the future will be better than the past. This will ensure that it will be able to turn around and move into the Gem quadrant.

Case Notes

Iris is a good example of why it is important to understand the nature of a company’s revenue. A company's revenue could come primarily from project-based activities or non-project-based activities.

This distinction has significant implications for various aspects of the company's operations and financial performance as it affects:

• Revenue predictability and stability. Revenue from project-based activities tends to be irregular.

• Risk management. Companies relying on project-based revenue are more exposed to risks such as delays, cancellations, or client default.

• Cash flow management. Payment schedules tied to milestones or project completion can lead to irregular cash flows, potentially causing liquidity challenges during lean periods.

• There may be spurts of revenue growth that are often tied to winning larger or more frequent contracts. 

• Operational efficiency and resource allocation. Project-based revenue requires high operational flexibility to meet varying project demands.

As you can see, there are many issues to consider when looking at revenue. You need to carry out a fundamental analysis to flesh out the nuances. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of Iris as of 13 Jan 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: The Fundamental Mapper gives you a first-cut picture. For a company in the Turnaround quadrant, it is not an obvious investment choice. In my detailed valuation of Iris, I have shown that it has fundamental strengths and the future will be better than the past. This will ensure that it will be able to turn around and move into the Gem quadrant. 

Case Notes

Iris is a good example of why it is important to understand the nature of a company’s revenue. A company's revenue could come primarily from project-based activities or non-project-based activities.

This distinction has significant implications for various aspects of the company's operations and financial performance as it affects:

• Revenue predictability and stability. Revenue from project-based activities tends to be irregular.

• Risk management. Companies relying on project-based revenue are more exposed to risks such as delays, cancellations, or client default.

• Cash flow management. Payment schedules tied to milestones or project completion can lead to irregular cash flows, potentially causing liquidity challenges during lean periods.

• There may be spurts of revenue growth that are often tied to winning larger or more frequent contracts. 

• Operational efficiency and resource allocation. Project-based revenue requires high operational flexibility to meet varying project demands.

As you can see, there are many issues to consider when looking at revenue. You need to carry out a fundamental analysis to flesh out the nuances. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of Iris as of 13 Jan 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: The Fundamental Mapper gives you a first-cut picture. For a company in the Turnaround quadrant, it is not an obvious investment choice. In my detailed valuation of Iris, I have shown that it has fundamental strengths and the future will be better than the past. This will ensure that it will be able to turn around and move into the Gem quadrant. 

Case Notes

Iris is a good example of why it is important to understand the nature of a company’s revenue. A company's revenue could come primarily from project-based activities or non-project-based activities.

This distinction has significant implications for various aspects of the company's operations and financial performance as it affects:

• Revenue predictability and stability. Revenue from project-based activities tends to be irregular.

• Risk management. Companies relying on project-based revenue are more exposed to risks such as delays, cancellations, or client default.

• Cash flow management. Payment schedules tied to milestones or project completion can lead to irregular cash flows, potentially causing liquidity challenges during lean periods.

• There may be spurts of revenue growth that are often tied to winning larger or more frequent contracts. 

• Operational efficiency and resource allocation. Project-based revenue requires high operational flexibility to meet varying project demands.

As you can see, there are many issues to consider when looking at revenue. You need to carry out a fundamental analysis to flesh out the nuances. This requires expertise and time. 

Visualizing a company’s business performance and investment risk (by comparing market price with intrinsic value) is one way to shortcut the process. The Fundamental Mapper helps investors make informed decisions as it provides such insights in an easy-to-see format.

You can see the position of Iris as of 13 Jan 2025 in the Fundamental Mapper chart below.

Download the Fundamental Mapper app now on Xifu to get investment insights into Bursa Malaysia companies

 

PS: The Fundamental Mapper gives you a first-cut picture. For a company in the Turnaround quadrant, it is not an obvious investment choice. In my detailed valuation of Iris, I have shown that it has fundamental strengths and the future will be better than the past. This will ensure that it will be able to turn around and move into the Gem quadrant. 

Financial position

I would rate Iris's financial position as moderately sound. While it has positive points, they were partly offset by some negative points. The positive points are:

• As of Sep 2024, it had RM 161 million cash. This is equal to 27 % of its total assets. 

• As of Sep 2024, it had an almost zero debt-capital ratio. 

• Over the past 12 years it had an average Reinvestment rate of 33%. I defined the Reinvestment rate as Reinvestment/NOPAT. Reinvestment = CAPEX & Acquisitions – Depreciation & Amortization + increase in Net Working Capital. A low Reinvestment rate meant that there was a big part of NOPAT that could be distributed to shareholders.

• Despite having a cumulative loss of RM 331 million over the past 12 years, it generated a cumulative RM 66 million cash flow from operations.
  
  
• Although it did not generate enough cash flow from operation, it had a reasonable capital allocation plan. Refer to Table 2. Funds raised were used to reduce debt and for CAPEX. 

Table 2: Sources and Uses of Funds 2014 to 2025

Apart from its low returns, the other negative point is that over the past 12 years, there was only 7 years year with positive cash flow from operations. 

Valuation

I based my valuation of Iris on the following picture.

Iris is a project-based Group. As such it is more appropriate to consider the 2022 to 2025 average revenue as the base revenue. The averaging would smooth out any “random” revenue fluctuation due to the project-based activities. 

Given its revenue growth history, I assumed that its revenue would only grow at the 4% perpetual growth rate. This is probably a conservative growth estimate given the double-digit market growth rate.

While there appears to be improving margins, I assumed that the base contribution margin and capital efficiency would be the 2022 to 2025 average values. I also assumed that the Reinvestment rate would follow the fundamental growth equation.

On such a basis, I obtained an intrinsic value of RM 0.50 per share compared to its market price was RM 0.32 per share (10 Jan 2025). There is a 57 % margin of safety. 

I would not consider my assumptions an aggressive one based on the picture shown in Chart 6. You can see that the projected Free Cash Flow lies on the projected historical trend line. The terminal revenue is just a bit higher than the 2024 revenue. 

My valuation model resulted in the following averages:

• 11 % ROIC that is about comparable to the past 4 years average ROIC.

• 11% EBIT margin compared to the past 4 years average 10%.

Chart 6: Projection

Valuation model

I valued Iris based on a single-stage valuation model as shown in Table 3. 

The basic equations used in the model are:

FCFF = EBIT(1 – t) – Reinvestment.

EBIT = Revenue X Contribution margin – Fixed cost. The earning was based on the business model shown in the right part of Chart 2.

Reinvestment was derived from the Reinvestment margin.

Table 3: Sample calculation 

The cost of funds was based on the first page results of a Google search for “Iris WACC”. Refer to Table 4.

Table 4: Estimating the cost of funds

Risks and limitations

I have not taken an aggressive approach in my valuation of Iris. Such an approach would have assumed that there were improvements in the contribution margin and capital turnover. 

I would require a multi-stage model for this which would have led to a higher intrinsic value. I did not carry out such a valuation as there is already a good margin of safety based on the single-stage model.

Furthermore, other valuation metrics also show margins of safety. Refer to Table 5.

• Iris's market price is lower than its book value. The market price is even lower than Iris NTA of RM 0.36 per share. 

• Its low Acquirer’s Multiple of 1.9 supports the under-pricing picture. 

• The only contradictory picture is the negative Free Cash Flow yield. 

Table 5: Other valuation metrics

Iris has strong fundamentals in terms of its market positioning, financial resilience, and operational improvements. Its focus on a growing industry and strategic initiatives to streamline operations provide a solid foundation. 

However, challenges such as low returns on capital, reliance on project-based revenue, and limited presence in key markets temper the positive outlook. 

Iris represents a turnaround story but there are risks:

• Project-based revenue model. Iris relies heavily on project-based revenue, which is inherently volatile and dependent on securing new contracts or renewing existing ones.

• A significant portion of its revenue comes from Africa, exposing the company to regional economic, political, and currency risks. 

• The identity verification industry is competitive, with players offering advanced technologies and competitive pricing. Iris may face difficulty in differentiating itself or maintaining margins.

The turnaround for Iris is not without risks. But its strategic realignment, operational improvements, and market potential provide a foundation for optimism. 

Conclusion

Iris has undergone significant transformation over the past decade. It had refocused its business model and aligned itself with global trends in trusted identification solutions. This strategic shift, coupled with divestments from non-core segments, has allowed Iris to emerge as a specialized player in the identity verification industry.

The Group has several strong fundamental points:

• The company's revenue recovery since 2021 underscores resilience and adaptability.

• Profitability metrics, particularly gross profit, and contribution margins signal operational improvements.

• It is moderately sound financially. This is marked by healthy cash reserves and negligible debt. 

However, its returns on invested capital and equity remain below its cost of capital, indicating limited value creation for shareholders. But post-2020, there are uptrends in the returns. 

Furthermore, the company's valuation reveals a substantial margin of safety.

Despite its strengths, Iris faces hurdles, including limited penetration in key tech markets such as the U.S. and China. There are also challenges inherent to project-based revenue streams. 

You should recognize Iris as a turnaround story. There is a potential upside, especially given its strategic positioning in the fast-growing identity verification market. 

Investment thesis

Iris is positioned as a promising turnaround story in the fast-growing global identity verification market. With a strategic focus on its trusted identification segment, the company has streamlined its operations and divested non-core businesses.

Key strengths supporting the investment case include a strong market position, operational improvements, and moderately sound financial standing. 

However, risks such as reliance on project-based revenue, regional exposure to Africa, and limited penetration in key tech markets temper the outlook. Despite these challenges, its improving operational metrics and strategic focus provide a foundation for long-term growth.

• Would you consider Iris a turnaround success based on these metrics? 

• How would you adjust for risks such as project-based revenue?

Case Notes An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions.  It defines your reasoning. A clear thesis encourages disciplined decision-making. It helps assess risks. It provides a benchmark to evaluate whether the investment is performing as expected. An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Case Notes

An investment thesis is a vital tool for any investor because it provides clarity, focus, and direction in decision-making. Learning how to draft an investment thesis is crucial for investors, especially those who want to make well-informed, rational, and successful investment decisions. 

• It defines your reasoning.

• A clear thesis encourages disciplined decision-making.

• It helps assess risks.

• It provides a benchmark to evaluate whether the investment is performing as expected.

An investment thesis is not set in stone - it is a living document. If the facts change, you can update your thesis or adjust your investment accordingly. This approach keeps you grounded and aligned with your investment principles.

Incorporating Iris into a Financial Plan

Investing in companies like Iris requires more than just analyzing business fundamentals - it should be part of a well-structured financial plan. Whether you are a seasoned investor or just beginning your wealth-building journey, understanding where such investments fit in your overall strategy is crucial. Some issues to consider include:

• Understanding your investment goals.

• Assessing risk and portfolio diversification.

• Liquidity considerations and time horizon. Turnaround stocks like Iris may take time to realize their potential. You should assess whether you have the patience and financial flexibility to hold such stocks over the long term.

While fundamental analysis is critical in evaluating individual stocks, it should be complemented with financial planning strategies. Some considerations include:

• Valuation relative to overall market conditions. Even if an individual stock appears undervalued, broader economic factors may affect performance.

• Macroeconomic and sector trends. 

• Personal financial situation. 

Investing as part of a financial plan requires ongoing assessment. Market conditions, personal financial goals, and company performance change over time. You should consider:

• Regular portfolio reviews to ensure that small-cap stocks do not become an outsized portion of their holdings.

• Seeking professional financial advice for guidance on asset allocation and risk management.

• Using tools like the Fundamental Mapper to track relative business performance and intrinsic value calculations over time.

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If the above article was useful, you can find more insights on how to make money in my e-book. The e-book is now available from Amazon, Kobo and Google Play.

PS: If you are in Malaysia or Singapore, the e-book can only be download from Kobo and Google Play. 

Disclaimer & Disclosure

I am not an investment adviser, security analyst, or stockbroker.  The contents are meant for educational purposes and should not be taken as any recommendation to purchase or dispose of shares in the featured companies.   Investments or strategies mentioned on this website may not be suitable for you and you should have your own independent decision regarding them. 

The opinions expressed here are based on information I consider reliable but I do not warrant its completeness or accuracy and should not be relied on as such. 

I may have equity interests in some of the companies featured.

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