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Why Buffett might appreciate Proactis value
Being bold when others are fearful is a mantra championed by many of the world’s best investors, including the sage of Omaha himself, Warren Buffett.
We believe that Proactis (PHD:AIM) is a value opportunity very much along those lines, one that could deliver 65% share price upside over the next 12 to 18 months, perhaps more.
Technology is typically most successful when it allows organisations to operate faster, cheaper and better. That’s just what the e-procurement and spend analytics platform run by Proactis does.
Through a suite of software applications, organisations are able to implement spending controls to extract best value from a streamlined procurement process.
This includes automated workflow, requisition authorisation, ordering, invoicing and stock control, with full visibility of costs through the buying pipeline.
The business has always been acquisitive, but in July 2017 it completed a very significant purchase of US-based Perfect Commerce for £99m, a deal that will more than double profits in future.
The company reported £5.1m of pre-tax profit last year to 31 July 2017. The equivalent figure this year is expected to be £11.7m, according to analysts at FinnCap, the company’s broker, and £14.7m next year to 2019.
CHALLENGES FROM A PERFECT DEAL
The scale of the Perfect Commerce acquisition implied challenges and like the characters in the Lemony Snicket books, Proactis has been struck down by a ‘series of unfortunate events,’ as one analyst puts it.
This largely stems from the surprise loss of four large accounts, although a stronger pound versus the dollar and euro hasn’t helped either. Analysts calculate that 56% of earnings before interest, tax, depreciation and amortisation (EBITDA) is non-sterling.
This spooked the market and led to the share price to drop from 190p in April.
Yet underlying key performance indicators remain encouraging. The company added 35 new customers accounts during the first half, keeping it on track with full year 70 targets, and most of those (31) are on a subscription basis, which typically are more sticky.
Proactis is also upselling impressively, getting existing clients to spend more over the platform. The company reported 46 in the first half this year, versus its 100 a year goal. It has £47.8m of forward orders backed up.
This gives us confidence that management can affect a rapid operating improvement as the company moves forward, and that should become reflected in the share price as investor confidence returns. FinnCap retains its 250p 12-month target for the stock. (SF)