Procurri Corporation Limited - DBS Research 2017-11-15: Profitability And Execution Are Key

Procurri Corporation Limited - DBS Vickers 2017-11-15: Profitability And Execution Are Key PROCURRI CORPORATION LIMITED BVQ.SI

Procurri Corporation Limited - Profitability And Execution Are Key

  • Procurri Corporation FY17F set to be in the red despite strong revenue momentum.
  • High absolute administrative expenses may be here to stay.
  • Maintain FULLY VALUED, TP of S$0.18.



Need to demonstrate execution. 

  • Procurri is in the trying phase of managing its core organic business (IT Distribution and Lifecycle Services) which saw the loss of a major customer in 2017. 
  • With cost issues related to EAF acquisition and Rockland JV, coupled with slower-than-expected organic business, Procurri may not be profitable in FY17F and any meaningful recovery is only possible in beyond FY18F. 
  • In our view, Procurri needs to show consistent profit growth over the next two-years to trade above the book value.


3Q17 results were below expectations despite strong revenue momentum. 

  • Procurri saw a slight profit of S$0.01m after recording a loss of S$1.67m in 2Q17, as revenue growth momentum bounced up to 61% y-o-y since the low of 2Q17 (2Q17: 21% y-o-y). However, overall gross margins were dragged down by IT Distribution segment which saw gross margins falling to a record low of 24% as Procurri gained traction with key customers. 
  • Management expects a profitable 4Q17 and net margins to exceed 3% in FY18F. We conservatively project 1.1% net margins for FY18F.


Overhang of high, growing administrative expenses. 

  • We had previously highlighted persistently high administrative costs as an area of concern. In 3Q17, administrative expenses increased from S$6.9m to S$12.7m (+83.9% y-o-y), compared against 2Q17 which saw an increase of S$5.9m to S$12.3m (+88.1% yo-y), while remaining largely flat q-o-q. 
  • The high cost base may be the run rate going forward.


Valuation

  • Maintain FULLY VALUED with TP of S$0.18 based on a 6% discount to FY18F BV/share of S$0.19 after accounting for value of intangibles on book. 
  • We are valuing on book, and not on 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 may jeopardise the ongoing consolidation of previous acquisitions and JV.



WHAT’S NEW - Earnings continue to disappoint 


3Q17 results were below expectations. 

  • Recovering from a net loss of S$1.7m in 2Q17, Procurri broke even in 3Q17 with NPAT of S$0.01m, compared against 1Q17’s NPAT of S$0.16m. 
  • 3Q17’s results were impacted largely by lower gross margins (compared to historical run rate), overhang of high administrative expenses, taxes, as well as a S$0.9m charge due to provision for stock obsolescence, against higher revenue.

Revenue momentum returns accompanied by lower margins.

  • Revenue growth momentum bounced up as revenue grew 60.9% y-o-y since the low of 2Q17 (21.3% y-o-y). Particularly, revenues of IT Distribution and Lifecycle Services segments increased by 52.7%/99.6% y-o-y respectively. 
  • However, against revenue growth, overall gross margins were dragged down by IT Distribution segment which saw margins falling to record low of 23.7%, where Procurri saw fewer high-profit-margin deals, and was also impacted by its bid to capture higher market share in the hardware resale industry. This was partially offset by Lifecycle Services’ gross margins which improved to 58.9% in 3Q17 (3Q16: 51.1%) as Procurri switched to its in-house capabilities to serve customers rather than outsource its maintenance requirements. 
  • Overall gross margins declined from 36.0% a year ago to 31.4% in 3Q16 (2Q16: 30.9%).

Higher costs look here to stay. 

  • In 3Q17, administrative expenses increased from S$6.9m to S$12.7m (+83.9% y-o-y), compared against 2Q17 which saw an increase of S$5.9m to S$12.3m (+88.1% y-o-y), while remaining largely flat q-o-q.
  • Costs relating to EAF acquisition and Rockland accounted for most of the increase. Staff costs, excluding EAF and Rockland, were S$0.9m higher (+25.9% y-o-y) on higher headcount, in line with the increase seen in 2Q17. The high cost base may be the run rate going forward, as it seems to have stabilised in the last two quarters, after climbing continuously since 2H16.
  • Procurri may be able to extract economies of scale on similar absolute cost base (which remained largely flat q-o-q) should it be able to grow its revenue base.


Outlook 


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.

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.


Maintain FULLY VALUED, TP of S$0.18 

  • We note that the management expects the transitional phase to grow recurring revenue from Lifecycle Services to smoothen out in FY2018.
  • We do not expect near-term upside in the company’s financial performance, as there is low earnings visibility and execution issues, and have further cut our earnings by -491%/-38% to S$-1.4m/S$2.0m. 
  • Our TP is based on a 6% discount to FY18F BV/share of S$0.19 after accounting for value of intangibles on book. We are valuing on book, and not on PE valuation methodology due to low earnings visibility. 
  • We are suspending coverage on the stock.




Singapore Research Team DBS Vickers | Sachin MITTAL DBS Vickers | http://www.dbsvickers.com/ 2017-11-15
DBS Vickers SGX Stock Analyst Report FULLY VALUED Maintain FULLY VALUED 0.180 Same 0.180



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