Proact: A bump in the road - ABG
This is a third party research report and does not necessarily reflect our views or values
Lumpy system sales and cloud order intake miss in Q2
Given a challenging market in 2020 due to COVID-19, Proact performed reasonably well. However, in 2021, we have started to see some weakness and sales decline mainly as a result of longer lead times and sales cycles in the Hardware market, as well as some component shortages. Even though we expected a -9% organic sales decline in Q2, the report missed our estimate with an organic sales decline of -14% and caused a smaller adj. EBITA miss of -2%. The sales miss was both related to System sales falling -21% organically y-o-y, but also Cloud revenues declined -4% organically. Following other company comments in the market, we see positive growth for IT infrastructure, Hardware and Services in 2021, so we are surprised by Proact’s weak performance. In fact, looking at 2018-2021e, we see an average annual organic decline of -1% for Proact, which we conclude must have underperformed IT investments in data storage (Hardware and Cloud space) and related services. With recent acquisitions and a satisfied customer group, we estimate that Proact should be able to return to organic growth and improve its mix between Hardware and Services to increase margins.
Negative estimate revisions
Due to longer sales cycles seen in the Hardware market and a weaker than expected order intake for Cloud solutions in Q2, we reduce our System and Cloud revenues while leaving non-cloud service revenues, like consulting, largely unchanged. All in all, this reduces both our sales estimate by 2% and adj. EBITA by 2-5% in 2021e-23e.
A balance sheet ready to act
Proact has a solid balance sheet, with a cash balance of SEK 500m and net cash of SEK 243m (lease adjusted), resulting in a 2022e lease adj. ND/EBITDA of -0.8x. On our new estimates, the shares trade at 9.1x 2022e EV/adj. EBITA, 40% below peers, and a 7-8% lease adj. FCF yield.
Given a challenging market in 2020 due to COVID-19, Proact performed reasonably well. However, in 2021, we have started to see some weakness and sales decline mainly as a result of longer lead times and sales cycles in the Hardware market, as well as some component shortages. Even though we expected a -9% organic sales decline in Q2, the report missed our estimate with an organic sales decline of -14% and caused a smaller adj. EBITA miss of -2%. The sales miss was both related to System sales falling -21% organically y-o-y, but also Cloud revenues declined -4% organically. Following other company comments in the market, we see positive growth for IT infrastructure, Hardware and Services in 2021, so we are surprised by Proact’s weak performance. In fact, looking at 2018-2021e, we see an average annual organic decline of -1% for Proact, which we conclude must have underperformed IT investments in data storage (Hardware and Cloud space) and related services. With recent acquisitions and a satisfied customer group, we estimate that Proact should be able to return to organic growth and improve its mix between Hardware and Services to increase margins.
Negative estimate revisions
Due to longer sales cycles seen in the Hardware market and a weaker than expected order intake for Cloud solutions in Q2, we reduce our System and Cloud revenues while leaving non-cloud service revenues, like consulting, largely unchanged. All in all, this reduces both our sales estimate by 2% and adj. EBITA by 2-5% in 2021e-23e.
A balance sheet ready to act
Proact has a solid balance sheet, with a cash balance of SEK 500m and net cash of SEK 243m (lease adjusted), resulting in a 2022e lease adj. ND/EBITDA of -0.8x. On our new estimates, the shares trade at 9.1x 2022e EV/adj. EBITA, 40% below peers, and a 7-8% lease adj. FCF yield.