Procurri Corporation Limited (PROC SP)
Company Update: 22 July 2021
21st century “karang guni”
We initiate on Procurri with a NEUTRAL and a target price of S$0.38. We use FY2022F EV/EBITDA as the valuation base, with a 7x peg.
- Secondhand serenade. The rising focus on environmental, social and governance (ESG) factors coupled with the pragmatic corporate concerns that COVID-19 caused may be the booster that the third-party maintenance (TPM) sector needs to take market share from original equipment manufacturers’ (OEM) maintenance teams.
- A private equity playground. The TPM sector observes strong activity levels amidst private equity players, and has been consolidating in the past 5 years at attractive valuations. Procurri has private equity backing as well and has also been the subject of an attempted acquisition by a major competitor.
- Initiate with NEUTRAL. While recent events imply valuation upside for the company, there are minimal catalysts to drive price action apart from another privatisation attempt in the near term.
Two factors for a secondhand serenade
It is no industry secret that TPM delivers significant cost savings over legacy OEM maintenance. However, as consideration for ESG factors becomes an increasingly important part of corporate culture, the rationale for companies to opt for post-warranty independent maintenance and resale equipment becomes more compelling. COVID-19 could be the kicker that IT departments need to go beyond entrenched practices and embrace “new” cost cutting measures such as TPM.
Private equity playground
The TPM sector has been consolidating, and is held by various private equity players whom are active in the space, either through strategic involvement or providing additional financial backing. Precedent transactions in the space have occurred at over 10x EV/EBITDA. These private valuations have attracted private equity involvement for Procurri with Novo Tellus taking a stake in 2019. Subsequent events continue to imply that Procurri’s private value could be worth more than what the public market currently values it for.
Valuation & Action
We initiate with a NEUTRAL and a TP of S$0.38 based on 7x of FY2022F EV/EBITDA. We think the 7x peg is a fair discount from precedent transaction multiples of privately held peers, leaving the privatisation door open should the opportunity arise again in the future.
While the target price implies over 12% upside from its current share price, we opt to keep the recommendation at a NEUTRAL as we expect little to no catalysts to drive up the share price in the near term. We expect share price action to remain weak for most of FY21 as the company looks to focus its efforts on restructuring in the wake of the pandemic.
We see upside potential when Procurri’s cost optimisation plans bear fruit, expanding upon the company’s razor-thin profit margins. Another privatisation attempt at this stage would be rather unexpected, but could help in driving up the market-perceived value of Procurri.
Risks
Inventory risk, increasingly competitive landscape. We also view the rise of hyperscalers in cloud computing as a net detriment for Procurri.
