Procurri Corporation Limited - DBS Research 2017-02-23: Higher costs and tax impact profitability

Procurri Corporation Limited - DBS Vickers 2017-02-23: Higher costs and tax impact profitability PROCURRI CORPORATION LIMITED BVQ.SI

Procurri Corporation Limited - Higher costs and tax impact profitability

  • 4Q16 net profit of S$2.5m (-48% y-o-y) was below expectations due to higher administrative costs and tax.
  • Expect delays in acquisition contributions to profitability.
  • Downgrade to HOLD with a revised TP of S$0.40.



Procurri offers 16% earnings CAGR over FY15-18F. 

  • Procurri is among the few companies globally that offer both hardware resale and independent maintenance services, also reflected in its healthy gross margins of over 33%. 
  • Procurri offers a 16% earnings CAGR over FY15-18F aided by acquisitions. However, the company needs to demonstrate better execution to gain market trust and trade at a superior PE multiple in our view.


Earnings miss due to cost escalations and higher tax. 

  • Excluding one-offs, 4Q16 net profit of S$2.5m (-48% y-o-y) was 35% below expectations mainly due to cost escalations. 
  • Admin costs increased 49% y-o-y due to higher headcounts in Asia to support expansion plans, coupled with higher listing and amortisation expenses. 
  • Over-provision of deferred tax assets in 4Q16 also resulted in the tax bill jumping in the quarter.


Lower FY16 profit base and higher tax rate lead to 23% cut in FY17F earnings. 

  • Corporate tax rate is expected to remain high ~25% in the future due to expiry of tax incentives in Singapore.
  • Key growth driver is expected to be ~S$2m earnings contribution in FY17 from recent joint venture with Congruity.
  • Another recent acquisition, EAF may contribute negligible profit in FY17 as the company achieves breakeven in 1Q17. In line with this, we have revised down our profit expectations for FY17/FY18 by 23%/13%.


Valuation

  • Downgrade to HOLD with a revised TP of S$0.40 due the lower FY17F EPS. 
  • We have pegged Procurri’s TP at 11x FY17F PE based on the average PE of comparable companies.


Key Risks to Our View

  • Further delay in potential acquisitions as we project these to contribute S$3m profit in FY18F.




Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-02-23
DBS Vickers SGX Stock Analyst Report HOLD Downgrade BUY 0.40 Down 0.560



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