IPS Securex Holdings - RHB Invest 2016-02-05: All Eyes On 2HFY16

IPS SECUREX HOLDINGS LIMITED 42N.SI

IPS Securex Holdings - All Eyes On 2HFY16

We expect the majority of IPS’ earnings to blast off in 2HFY16 mainly due to recognition of its partial orders drawn down from the Letters of Intent (LOIs) consisting of USD55m PepperBall and USD64m Hyperspike orders, which would come mostly in 2HFY16 because of seasonality.
Maintain BUY and SGD0.40 TP (105% upside).
Given the political unrest in certain countries coupled with increased terrorist activities, we expect governments to continue to spend more to improve their homeland security systems and equipment.

1HFY16 (Jun) topline and NPAT grew by 20.5% and 10% respectively, in line with our estimates. This was driven by a 29.4% revenue increase in the security solutions business and a 6.6% increase in the maintenance and leasing business.
Gross margins remained strong at 48.4% due to the product mix, which consists mainly of Hyperspike-related equipment.
However, 2HFY16 will be the one to look out for.

We expect IPS Securex (IPS) to deliver and recognise at least USD13m worth of PepperBalls and USD6m worth of Hyperspike-related products in 2HFY16, which should drive the majority of our FY16 NPAT growth forecast of 385%.
Management has also guided in its forward-looking statement that there will likely be stronger sales in 2HFY16, as government bodies and agencies typically finalise their defense and security budgets in December and only issue orders from then onwards.

We have highlighted that Airports of Thailand (AOT TB, TAKE PROFIT, TP: THB251.00) has outlined plans to complete expansion and development works across all of its six airports within the next two years, and that IPS will likely participate in tenders to supply US Transportation Security Administration (TSA)-certified machines in the baggage and cargo scanners space.
Tender results will likely be revealed in Feb 2016 and we expect IPS to secure at least USD150m worth of tenders on this front.

The spate of riots around the region and the growing dissent and distrust amongst the populace towards certain governments help to reinforce the need for more effective non-lethal weapons like PepperBall.
In addition, the rise in terrorist activities in the past few months has also sent a wakeup call to governments to tighten their security systems, especially checkpoint scanners and cargo/bagger scanners.
Even with an economic downturn, we think IPS is in a sweet spot to capitalise on the current world climate and as such, we expect it to continue to secure large contract sales.
Coupled with the huge contracts already secured, IPS should enjoy strong growth for the next few years.
In addition, we think management is likely keen to reward shareholders with a special dividend if the company performs well.
Maintain BUY with an unchanged DCF-backed TP of SGD0.40, backed by 10.4x FY17F P/E.
The key risk to our call and TP would be that of governments/customers delaying orders.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-05

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.40 same 0.40