IPS Securex Holdings - RHB Invest 2017-09-11: Removing PepperBall From The Equation

IPS SECUREX HOLDINGS LIMITED 42N.SI

IPS Securex Holdings - Removing PepperBall From The Equation

IPS Securex has made an allowance of doubtful debt of ~SGD3m, which involves the sale of PepperBall and related equipment to one of its regional customers.
We think the probability of repayment is low, as well as the fulfilment of the USD54.8m LOI. As a result, we have removed the sale from our estimates, which results in a lower DCF-backed TP of SGD0.09 (from SGD0.34, 13% upside).

In addition, certain project delays, like AOT’s airports upgrades, also hamper its prospects going forward. Hence, we downgrade the stock to NEUTRAL (from Buy).

IPS Securex Holdings (IPS) has made an allowance of doubtful debt of ~SGD3m. This involves the sale of PepperBall and related equipment to one of its South-East Asian customers.
Previously, we understood that the customer had signed an agreement subsequent to the year end for instalments to be paid from Aug 2016 to Sep 2018.
IPS received an initial payment of SGD0.7m in Aug 2016 but, subsequently, faced continuous delays in terms of the instalment payments. As a result, we think that the odds of the customer repaying in the near term is very low, and the write-off would provide the company with a better base to start afresh.
However, any repayments in future ought to provide uplift for IPS’ financials, as it would be recorded as other income in the P&L.

On 29 Apr 2015, IPS announced that it had received a LOI with a total contract value of USD54.8m to supply to a government body in South-East Asia over a 2-year period. Initial orders were received, but payments and subsequent orders have been delayed multiple times.
As a result, we think that the fulfilment of the USD54.8m LOI is very low, and have removed it from our FY18 and FY19 estimates. This results in our NPAT being lowered substantially by 68% (FY18) and 71% (FY19).

With the acquisition of security solutions provider Yatai Security & Communications Pte Ltd (Yatai) – as well as the hiring of a few senior personnel to help grow the business – we believe management is continuing to participate aggressively in the supply of scanning equipment for checkpoints and airports, especially in Singapore.
Any contract wins would also help to build up IPS’ maintenance recurring revenue base over the longer term.

With the removal of the PepperBall sale, which makes up a substantial amount of our NPAT and investment thesis, coupled with certain project delays like Airports of Thailand’s (AOT) (AOT TB, BUY, TP: THB46.50) airports upgrades and increased manpower costs due to the hiring of a few new senior personnel, we downgrade this counter to NEUTRAL (from Buy) with a lower DCF-backed TP of SGD0.09.
A key risk to our call is delays in government payments or orders.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2017-09-11

RHB Invest SGX Stock Analyst Report NEUTRAL Maintain BUY 0.09 Down 0.340