KGI Research analyst Kenny Tan has initiated “neutral” on IT equipment seller Procurri Corp with a target price of 38 cents, representing a 12% upside to the counter’s share price of 34 cents as at July 22.
The target price is derived from Procurri’s “FY2022 EV/EBITDA as the valuation base with a seven times peg”, says Tan in a July 22 report.
“We think the seven times 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,” he writes.
Despite the higher target price compared to its current share price, Tan says the “neutral” recommendation stems from the little to no catalysts that may drive up Procurri’s share price in the near term.
To this end, Tan expects the counter’s share price to “remain weak” for the most of FY2021 as the company looks to focus on restructuring amid the Covid-19 pandemic.
Calling Procurri the “karang guni” of the 21st century, the rising focus on environmental, social and governance (ESG) factors coupled with the corporate concerns arising from Covid-19 may prove a boost for the third-party maintenance (TPM) sector taking market share from the original equipment manufacturers’ (OEM) maintenance teams.
“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,” writes Tan.
Furthermore, the TPM sector also delivers significant cost savings over legacy OEM maintenance.
“The TPM sector observes strong activity levels amidst private equity players, and has been consolidating in the past five years at attractive valuations,” says Tan.
Transactions that have previously taken place have occurred at over 10 times EV/EBITDA, notes Tan.
See also: Novo Tellus says offer price for Procurri partial offer is final
In addition, the private valuations have seen 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,” he says.
Moving forward, Tan says Procurri may enjoy upside potential when its cost optimisation plans bear fruit, expanding upon the company’s 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,” says Tan.
That said, risks of inventory, an increasingly competitive landscape and the rise of hyperscalers in cloud computing may prove to be a detriment for the company.
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Shares in Procurri closed 0.5 cent lower or 1.5% down at 33 cents on July 22.
Photo: Stock photo
