Procurri enjoys growing acceptance for pre-loved IT gear along with ESG awareness
With more companies managing their business based on environmental, social and governance (ESG) principles, one might think that clean energy producers and tech firms will be on the cutting edge, coming up with innovations to help companies achieve their ESG goals.
IT equipment reseller Procurri Corp is one company that claims to be in a position to be on the edge of the ESG wave and if chairman and global CEO Sean Murphy is successful, investors can expect the company to see improving earnings in line with heightened consciousness over sustainability.
While cost savings are still a big part of what makes Procurri’s solutions attractive, Murphy says what’s really exciting about this new wave is that companies are not making decisions based on cost savings but the correct ESG principles right from the start.
For example, he has seen companies provide older, refurbished phones to their employees because they know it is better for the environment. Procurri has also received enquiries from companies that are looking for such refurbished equipment and the services to maintain them.
Business model and cloud future
Procurri has three main business segments. The first is its hardware resale segment, where it locates excess equipment around the world and resells them to companies that prioritise cost savings over bragging rights of owning the latest and fanciest gear.
It also does third-party maintenance and data centre services for data centre equipment, which allows customers to save up to 20% in costs and extends the life of equipment up to 15 years.
To round off the lifecycle, Procurri also provides IT asset disposition (ITAD) services where it disposes IT equipment by taking it back and putting it up for resale or by harvesting parts from disposed of products to recycle it back into the ecosystem.
The focus, Murphy says, used to be all about cost savings as companies renewed their IT hardware from time to time. But this changed with the advent of cloud computing.
He observes that companies are keeping their current IT assets longer as more software services are available on the cloud. While this means users are changing their equipment less frequently, it offers a bigger opportunity for Procurri to win third-party maintenance contracts for the IT equipment of these companies, which may no longer be supported by authorised sales channels and tech support networks.
Murphy says the provision of third-party IT maintenance services by Procurri is a “very high margin business” and generates “recurring revenue” for the company. In fact, this business segment is so attractive that Park Place Technologies, a company that specialises in third-party maintenance, offered to buy over the division in January 2020 for US$115 million ($154.12 million). That is about 71% more than Procurri’s entire current market cap of $89.74 million as of Sept 21.
According to Murphy, cloud computing has also brought about the realisation that some of these hardware assets will eventually be disposed of and with sustainability foremost on their minds, companies that don’t want the products to end up in a landfill will turn to Procurri.
Procurri’s solutions also fit in with the idea of generating less waste, says Murphy. “Companies are thinking that ‘I need some extra computing power but maybe I can buy one that’s already been used, so we don’t have to make a new one.’”
That also results in less garbage and companies are also realising that “if I can keep my older systems running longer, that will keep the stuff out of the landfill too.”
Indeed, Procurri notes in its latest half-year earnings report that the multi-year shift towards cloud and edge computing has generated higher demand for Procurri’s solutions as enterprises seek to keep rising capital expenditures in check, put a lid on operating costs and eke out higher IT productivity.
Murphy says this is exciting because although the company has always been competing with the “latest and greatest” in IT hardware as the world moves toward a more digitalised future, there is a growing acceptance among customers to use equipment that’s “n minus one” that refers to IT components and hardware that is one generation behind the cutting edge.
“If a customer has servers that are one or one and a half years old that’s ‘n minus one’ when they go to the cloud, [and] if they want more computing power today, they still want to add ‘n minus one’ because they don’t want to have different varieties in their data centre. So that’s what makes our ‘n minus one’ already compelling,” says Murphy.
Moving forward, Murphy singles out the recycling portion of Procurri’s business as one that is going to be ever more important as cloud computing becomes more prevalent. “The new toy is the cloud. The cloud computers can take the components out of our things and they’ll use a lot of them to build new cloud computers because a lot of the components don’t change that much.”
With cloud computing, he expects that the procurement of new hardware will taper off in the long term, which means that Procurri’s resale and maintenance business, in the long term, may go into decline. However, the ITAD business will likely remain in demand and grow even more. “The idea of harvesting parts out of something that’s already been built in already been used, and putting it back into something else, is an idea I think that’s here to stay,” says Murphy.
Ready for a reversal?
For 1HFY2021 ended June 30, Procurri reported earnings of $2.25 million, down 15.1% y-o-y, as it sold more lower-margin products and booked impairment for some obsolete stock. And if government grants and other subsidies supporting businesses throughout the pandemic were excluded, Procurri would have been $992,000 in the red.
In the same period, its revenue extended its growth trajectory. It was up 14% y-o-y to $125.9 million, with growth coming from its key markets of North and South America as well as Europe. Back in FY2016, the company generated revenue of $135.7 million, which increased to $233.4 million in FY2020.
However, earnings have been moving in the opposite direction. From FY2018’s $5.3 million, Procurri recorded earnings of $3.7 million in FY2019 and $2.7 million in FY2020. Despite the drop in profit, the company’s cash and cash equivalents are still strong, coming in at $22.87 million in 1HFY2021 compared to the $17.74 million reported in 1HFY2020.
Big investor eyes a stake
Earlier this year, Procurri made the news when investment firm Novo Tellus Capital Partners made a partial offer of 36.5 cents per share to raise its stake in Procurri from 28.83% as of March 26, by another 27.91% or 82.12 million shares. Novo Tellus is an investor in notable tech companies such as Sunningdale Tech, ISDN Holdings, and Grand Venture Technology.
The offer, valued at $29.97 million, will give Novo Tellus a stake of 51% (after share transfers) in Procurri and majority control so it can play a “more active role” and help Procurri create long-term share value.
As part of the deal, five senior Procurri executives including Murphy agreed to approve the offer and tender 50% of their shares, which amounted to 17.35 million shares or 5.90% of all shares, in alignment with the offer.
However, the offer of 36.5 cents — a near one-third premium over the last traded share price — failed to go through, with only 37.37% of shares in favour of the partial offer. DeClout, Procurri’s former controlling shareholder, not only opposed the offer but even bought more shares in the market to fortify its position.
Murphy explains that he and his colleagues see Procurri as “a much bigger company that’s growing it at a very fast rate and making a very healthy bottom line.” However, to achieve that, they needed a flagship shareholder that can bring to the table the required investments while maintaining a profitable operation.
He explains that because over the past nine months, Procurri has invested in things like upgrading its service infrastructure and improving efficiencies for its sales team, and may have “over-invested”, resulting in “a small loss”.
According to its 1HFY2020 press statement, the investments also include expanding its team with “strategic industry hires to deepen capability.” and expanded the company’s ITAD business to support large-scale global ITAD partners.
There were also investments in global finance, business intelligence, sales force automation, and inventory management systems across the company as well, with global rollout now past the 50% mark, so that Procurri can operate more efficiently. As an indication, the company cut its operating costs for 1HFY2021 by 10.3% y-o-y to $30.8 million.
However, Murphy is not content with just transforming Procurri internally. The way he sees it, there is a very large addressable market and he fully intends to take a bigger slice of the pie. He realises that in the past, Procurri has been competing in each of its business segments individually. With the transformation, the company will be able to market its solutions as a bundle, giving Procurri an “unfair advantage” over the competition.
“We’ve been able to keep our customers happy, we’ve kept our balance sheet [positive], and now with Novo Tellus coming in, giving us some good guidance. I feel like we have like a new lease on life, and with this ESG way, probably with the change in the American presidency, the timing could not have been better.”
Year to date, Procurri shares are up 10.91% to close at 30.5 cents on Sept 21.
Novo Tellus currently holds 30% of Procurri. The partial takeover offer bid in April fell through at $0.36. Once SPAC IPO goes through, Procurri is a very likely target for acquisition by Novo Tellus at a higher price with the funds raised from the SPAC IPO.
a better way to accurately value Procurri is using price to cash flow ratio instead of price to earnings. The value of this company has been distorted by the lack of growth of earnings in recents years despite growing revenue, and the reason is mainly due to high depreciation and amortisation.
If we look deeper into the financial statement, operating cash flow has been increasing steadily in the past 5 years. The recent strategic restructuring of the business is likely to show results soon and I am very confident Procurri will be a multi bagger in 2022.
The average PCF ratio is about 5x the past 5 years. Taking the latest operational cash flow per share of $0.09 and multiply by 5 (average PCF ratio), the stock is worth at least $0.48.
Novo Tellus has officially lodged the SPAC IPO listing. Note in its press release statement "The SPAC positions itself as "a distinctive opportunity to invest alongside a leading private equity fund" that is Novo Tellus PE Fund 2 - backed by a sponsor group with a "clear, repeated track record of successful investments" in technology and industrials companies."
Novo Tellus PE Fund 2 attempted a partial offer for Procurri last year. Also note that the other shares that Novo Tellus has invested in, i.e. ISDN and Grand Venture has been a multibagger since. Procurri will be next.