Proact IT Group
Proact - Soft report, but cloud orders remain solid (ABG Sundal Collier)
2019-07-11 21:55
Soft Q2 after a strong Q1
‘19e-‘21e EBIT estimates down by 4-27%
M&A potential remains
Y-o-y Q2 sales and adj. EBITA down 7% & 33%, resp.Q2 sales came in at SEK 806m, corresponding to a y-o-y decline of -7.1% (-8% organic). This was 12% below ABGSCe, whereas weak system sales, mostly relating to business unit West and UK, were primarily behind the soft result. Although cloud orders continue to show strong progress (up 12% y-o-y), neither did service sales overwhelm us, coming in at -3% on an LFL basis. In terms of profitability, the adj. EBITA margin was 4.6% vs. our forecast of 6.5% (PACT had a non-recurring item of SEK 9.1 during Q2). It is mainly West that has burdened earnings as the other regions, including UK, reported solid margins.
We lower sales and EBIT due to the weaker outcome
Proact’s management is unhappy with the quarter, but is clear on the fact that the market remains healthy and that the problems could be fixed internally. Furthermore, it states that one reason behind the recent performance has been a bad balance between sales and technology people in its workforce, a problem that it now aims to tackle. We think another reason could be that PACT took many low-margin orders in Q1 which inflated the quarter’s sales metrics, although it has now hurt Q2 margins. We know that system sales can be lumpy between quarters, and have therefore not extrapolated the outcome extensively. Even so, we reduce our ’19e-‘21e EBIT by 4-27% as a reflection of the report. We assess that West will bounce back, although we remain cautious on the UK ahead (~15% of sales) given a potentially looming Brexit.
Share is trading at 11x ’19e EV/EBIT with a FCF yield of 8%
On our revised estimates, we expect Proact to have 4.9% sales growth with an adj. EBITA margin of 5.3% in FY’19e. However, these numbers do not incorporate any M&A, which we continue to think PACT’s robust balance sheet is supporting. The company has appointed a new head of M&A and its management says that it has pin
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