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Proact IT Group
Proact - Q3: Growth, lower costs and M&A - check (ABG Sundal Collier)
2020-10-25 12:44
Q3 beat driven by costs, cloud orders need to improve
Acquires Cetus for 8x EV/EBITA, adds 5% to EBITA
8.7x 2021e EV/EBITA is 41% discount to peers
Second beat in a row, but cloud orders need to step up soonProact delivered a solid Q3 report, with 7% organic growth (ABGSCe 6%) and adj. EBITA up 46% y-o-y, or 18% above our estimate and 32% above consensus. We conclude that the main driver for the beat was lower costs and maintained deliveries, of which system sales stood out. We find part of the lower costs temporary, as sales-related costs (travel, clients meetings etc.) are low due to the pandemic. We fear that this could lead to lower new sales and hence lower growth in the coming quarters. For example, cloud revenues have been growing consistently (average est. organic growth 21% in last six quarters), while cloud order intake has been declining y-o-y for the last four quarters at an average rate of -28%. Given that total service revenues only grew 1% in the quarter, non-cloud revenues declined an estimated -14% y-o-y, which was a negative figure for the seventh quarter in a row. We would like to see cloud orders start to grow to feel confident in the underlying transition from system sales to service sales.
Acquires Cetus Solutions for 8x EV/EBITA, adds 5% to EBITA
In conjunction with the report, Proact acquired the UK company Cetus Solutions, increasing its UK business by 25%. With a similar revenue mix as Proact (60/40 System/Services est.), the 7% EBITA margin is quite impressive and shows margin potential in Proact’s business model. The acquisition price of 8x EV/EBITA is attractive, and we think this is in line with the strategy of reaching an 8% EBITA margin long-term, partly through M&A.
Adj. EBITA up 7-9%, at a 41% discount to peers
Based on the report and the acquisition, we raise ’21-‘22e group adj. EBITA by 7-9%, and find the current ‘21e EV/EBITA valuation of 8.7x at a 41% discount to peers. Proact has proposed resuming its SEK 2.50 DPS for 2019.
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