German turnaround may take some time

UK Brexit uncertainties, but Nordics should hold up

Lower margin estimates, c. trading at 7.4x ‘20e EV/EBITA

Soft wording regarding the global IT market
Proact delivered an underwhelming Q2 report, with sales and adj. EBIT y-o-y decline of -7% and -33%, respectively. The primary reason for the weak quarter stemmed from weak performance in its business unit West, both relating to system and services sales. According to the company, the issues were solely internal, as the market has remained healthy. Even so, we have lately noted some weak macro trends that we argue could have a negative effect on parts of Proact’s operations. For instance, in the beginning of August, we saw that NetApp (which comprises one of Proact’s biggest suppliers) revised its full-year guidance downwards. Furthermore, we have seen some soft wording regarding the IT market from Dell and HP in their last conference calls as well as lower demand in the local IT services market (HiQ, Knowit, B3 Consulting etc.)

Lowered sales and EBIT forecasts
In light of these events, combined with Brexit uncertainties for UK, and a longer turnaround time for Germany (West), we have revised our sales and EBITA forecasts downwards. Our ’19e-‘21e sales and EBITA estimates are cut by 1% and 3-17%, respectively. For Q3’19e, we estimate sales of SEK 443m, up 0% y-o-y of which -1% organic. The corresponding EBITA forecast is SEK 37m, representing a margin of 5.1%.

7.4x ‘20e EV/EBITA, double-digit FCF yield
Despite the soft start to 2019, we have seen good progress in Proact’s cloud orders. As these are characterised by higher margins and support Proact’s sensitivity to economic cyclicality, we find this positive for the longer-term margin. On our revised estimates, the share currently trades at 7.4x ‘20e EV/EBITA. Furthermore, the ‘19e leased adjusted ND/EBITDA of -0.9x provides good headroom to conduct M&A.

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