Procurri Corporation Limited - DBS Research 2017-02-23: Higher costs and tax impact profitability | SG Investors.io

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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