PROCURRI CORPORATION LIMITED
BVQ.SI
Procurri Corporation Limited - Earnings Visibility Unclear
- Procurri's 2Q17 loss of S$1.67m was below expectations.
- Overhang of high, growing administrative expenses.
- Disappointed by acquisitions.
- Downgrade to FULLY VALUED, revised TP of S$0.18.
Disappointed by core organic business and acquisitions.
- We are disappointed by Procurri’s core organic business (IT Distribution and Lifecycle Services) as the company struggles to replace revenue arising from the loss of a major customer.
- On the acquisitions front, we had expected ~S$2m earnings contribution in FY17. However, due to cost issues related to EAF and Rockland JV coupled with slower than expected organic business, Procurri may be barely profitable in FY17F and any meaningful recovery is only possible in FY18F.
WHAT’S NEW
2Q17 results a disappointment. Loss of S$1.67m was below expectations.
- Procurri saw a loss of S$1.67m in 2Q17, bringing 1H17 loss to S$1.51m, due to declining gross margins across both IT Distribution and Lifecycle Services, and persistently high administrative costs amid accounting changes for revenue recognition.
Revenue growth momentum slowed to 21% y-o-y (1Q17: 47% y-o-y).
- Revenue growth momentum has also slowed to 21% yo-y (1Q17: 47% y-o-y) despite 1Q17 being a seasonally weak quarter.
- According to management, revenue and earnings were partially affected ( < 10% impact on revenue, ~$0.8m impact on NPAT) by a change in accounting practice for the maintenance service orderbook in the Americas where linear recognition of maintenance service contracts is now adopted, in contrast to previous upfront revenue recognition.
Blended gross margins declined to 30.9% (1Q17: 33.6%).
- We note that margins in the Lifecycle management segment had declined from 55-80% in FY15 to 33.7% in 2Q17 due to high cost of sales and Procurri’s pursuit of market share.
Overhang of high, growing administrative expenses.
- We had previously highlighted persistently high administrative costs for the company which is an area of strong concern. In 2Q17, administrative expenses saw an increase of S$5.9m to S$12.3m (+88.1% y-o-y), compared against S$9.8m in 1Q17 (+67.9%).
- We continue to be disappointed by the growing administrative expenses which grew S$6.4m to S$12.3m this quarter (+108.2%), mainly due to costs relating to EAF acquisition and Rockland.
- Staff costs, excluding EAF and Rockland, were S$1.0m higher (+26.4% y-o-y) on higher headcount, in line with the increase seen in 1Q17.
- The remaining increase in administrative expenses is due to rental and maiden post-listing compliance costs.
Outlook
Needs to demonstrate better earnings execution.
- 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.
Transition phase.
- We note that the management expects the transitional phase to grow recurring revenue from Lifecycle Services to smoothen out in FY2018. Till then, we do not expect near-term upside in the company’s financial performance.
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 before taking on a new acquisition.
Valuation
- Downgrade to FULLY VALUED with a revised TP of S$0.18 based on a 5% discount to FY18F BV/share of S$0.19 after accounting for value of intangibles on book.
- We switched from PE valuation methodology due to low earnings visibility.
Key Risks to Our View
- The company may be unable to demonstrate earnings execution and cost control. Further acquisitions at this point may jeopardise the ongoing transition and consolidation of previous acquisitions and JV.
Singapore Research Team
DBS Vickers
|
Sachin MITTAL
DBS Vickers
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http://www.dbsvickers.com/
2017-08-15
DBS Vickers
SGX Stock
Analyst Report
0.18
Down
0.320
