IPS Securex Holdings - RHB Invest 2016-02-26: Yatai And Avac Acquisition a Positive Move

IPS Securex Holdings - RHB Invest 2016-02-26: Yatai And Avac Acquisition a Positive Move IPS SECUREX HOLDINGS LIMITED 42N.SI 

IPS Securex Holdings - Yatai And Avac Acquisition a Positive Move 

  • We believe the SGD1.87m Yatai and Avac deal strengthens IPS’s standing as an ideal proxy for those seeking investment in the homeland security and defense theme. 
  • While the combined FY15 net profit from the two companies is only SGD0.79m, we expect IPS to potentially make more similar acquisitions in its aim to establish itself as a prominent AsiaPacific security provider. 
  • Maintain BUY and DCF-derived TP of SGD0.40 (114% upside). 

Intending to be a key security provider in Asia. 

  • This acquisition is positive for IPS Securex (IPS) and complements its general security business, allowing it to expand its market share in Singapore and build up its general security business. 
  • Going forward, we expect IPS to continue potentially making more similar acquisitions as it aims to establish itself as a key homeland and general security player in Asia. 

Conditional sale and purchase agreement for Yatai and Avac. 

  • IPS has agreed to acquire 100% – instead of the previously agreed 40% – of Yatai Security & Communications Pte Ltd (Yatai) and Avac Systems Pte Ltd’s (Avac) share capital for ~SGD1.87m (2.35x FY15 (Jun) P/E). 
  • This acquisition would be completely funded by internal cash flows and management projects it would increase EPS to SGD0.57/share, from SGD0.47/share. 
  • However it is only mildly accretive to our FY16 forecasts, due to the small absolute value in terms of net profit. 

USD0.9m order for sale and maintenance of scanning equipment. 

  • Separately, IPS has received a purchase order for the sale and maintenance of scanning equipment valued at USD0.9m from a customer in South-East Asia, for delivery by 30 Jun. We believe this is a teaser for what is to come in its AOT tender, which we expect to be worth at least USD150m. 
  • The result of this tender would likely be revealed in the next few weeks. 

An ideal proxy to the homeland security and defence theme. 

  • The spate of riots around the region, as well as the growing dissent and distrust amongst the populace towards certain governments, has helped to reinforce the need for more effective non-lethal weapons like PepperBall. 
  • In addition, the increase in terrorist activities in the past few months may also spur governments to tighten their security systems, especially checkpoint scanners and cargo/bagger scanners. 
  • Even in an economic downturn, we think IPS is in a sweet spot to capitalise on the current world climate, and we expect to continue seeing the company secure large contract sales from other countries. 
  • Coupled with the sizeable contracts already secured, IPS should enjoy strong growth for the next few years. 
  • We also think management is likely keen to reward shareholders with a special dividend, if it performs well. 
  • We maintain BUY with a DCF-backed SGD0.40 TP, implying 10.4x FY17F P/E.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-02-26
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 0.40 same 0.40