Procurri Corporation Limited (PROC SP) - DBS Research 2017-05-15: Drag From Higher Costs

Procurri Corporation Limited (PROC SP) - DBS Vickers 2017-05-15: Drag From Higher Costs PROCURRI CORPORATION LIMITED BVQ.SI

Procurri Corporation Limited (PROC SP) - Drag From Higher Costs

  • 1Q17 net profit of S$0.16m (+74.5% y-o-y) lifted by tax credits of S$0.14m, but below expectations due to persistently high administrative costs.
  • Gross margins held up at around 33%.
  • Expect delays in acquisitions.
  • Maintain HOLD with revised TP of S$0.32.



What’s New 


1Q17 net profit of S$0.16m (+74.5% y-o-y) was below expectations due to persistently high administrative costs.

  • 1Q17 net profit of S$0.16m was lifted by tax credits of S$0.14m. Otherwise, net profit was below our expectations of S$1 – S$1.2m for 1Q17 due to persistently high administrative costs of S$9.8m (+67.9% y-o-y) on additional headcount and operating expenses of ~S$2.4m from EAF acquisition and Rockland JV. 
  • Staff costs, excluding EAF and Rockland, was ~S$3.8m (+26.4% higher y-o-y), accounting for ~40% of total administrative costs.

Revenue growth of 47.2% y-o-y on the back of contribution from acquisitions. 

  • IT distribution revenue and lifecycle services revenue of S$20.5m and S$5.5m respectively was 49.9% and 36.9% higher y-o-y mainly due to contribution from EAF acquisition and Rockland JV, as North and South America, Europe, Middle East and Africa regions saw better y-o-y performance. 
  • We note that while Rockland JV saw higher revenue contribution, margins were lower. On a q-oq basis though, revenues were down by 9% due to seasonal factors.

Overall gross margins for 1Q17 held up at 33.6% (4Q16: 33.0%). 

  • Overall gross margins held up at ~33%, similar to previous quarters, on the back of higher margins of 32.3% (4Q16: 27.4%) from IT Distribution, which benefitted from higher sales to value-added retailers from Rockland and EMEA during the quarter. 
  • This was offset by lower margins from Lifecycle Services of 38.9% (4Q16: 48.1%) on lower margins in Rockland JV and Singapore.

Additional capex of S$19.2m for Rockland’s maintenance business. 

  • There was S$16.9m of additional capex incurred due to maintenance parts equipment acquired for Rockland’s maintenance business. The remaining S$1.7m was attributed to a contract in Singapore for its “hardware as a service” business.

Outlook Needs to demonstrate better earnings execution. 

  • Despite the strong growth expected in the medium term, the delayed bottom-line contribution from acquisitions and cost escalations have lowered expectations for near-term profitability. We believe that the company needs to demonstrate better earnings execution to gain market confidence.

Further delays in potential acquisitions expected. 

  • While the company continues to selectively prospect for acquisition targets, which in our opinion would be in the IT Asset Disposition business, we believe the company still requires some time to improve its current execution with the EAF acquisition and Rockland JV.

Higher effective tax rate expected going forward. 

  • Due to the change in business mix with more US-related revenues, we expect effective tax rate to be ~27% going forward.


Valuation and Recommendation 


Maintain HOLD with a revised TP of S$0.32. 

  • We maintain our HOLD call on Procurri with a revised TP of S$0.32, based on 9.3x PE on blended FY17F/18F earnings. 
  • We apply a 15% discount to average PE of comparable companies due to execution concerns




Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-05-15
DBS Vickers SGX Stock Analyst Report HOLD Maintain HOLD 0.32 Down 0.400



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