IPS Securex Holdings - Fire In The Hole

IPS has received an earlier-than-expected USD4m purchase order, which will be directly accretive to FY15 NPAT, but growth will be limited by one-off costs from its co-manufacturing partnership. Maintain BUY and SGD1.01 TP (28% upside, 7.4x FY16F P/E). This purchase order is a vote of confidence for PepperBall products. As the master distributor of PepperBall in Asia-Pacific, IPS is poised to receive an earnings boost from this game-changing product.

Receives first purchase order
IPS Securex (IPS) has received a purchase order (PO) for PepperBall products, following the letter of intent from a South-East Asian government body for a total contract value of USD54.75m over a period of two years. This initial PO is worth USD4m and will be accretive to earnings in FY15, earlier than initially anticipated. In addition, PepperBall-related products have high gross margins of 40- 50% and do not require a significant increase in operating costs, which means that gross profits will likely flow directly to its bottomline.

Potential drag from co-manufacturing
As previously announced, IPS has entered into a memorandum of understanding with PepperBall manufacturer United Tactical Systems LLC to explore potential comanufacturing opportunities such as component manufacturing, product assembly and product service. We forecast that IPS will incur one-off costs of SGD2m-3m in FY15 from this partnership, which could drag down FY15 earnings. However, it has the potential to increase margins for PepperBall products by 10-15% going forward.


Technical Analysis
Daily Chart
Larger contracts ahead; maintain BUY
The potential of PepperBall as a game-changing, non-lethal counter-measure technology has been validated by this initial PO. This should trigger a series of larger orders from neighbouring countries, and IPS should benefit from this uptrend as it has exclusive master distributor rights in Asia-Pacific. We expect the full accretion from Pepperball-related products to come in by FY16. 

Maintain BUY with an unchanged TP of SGD1.01 (28% upside), pegged to 7.4x FY16F P/E, as we think that IPS’ outlook is bright and positive, especially for its Pepperball-related products which could take its earnings to the next level. (Read Report)

Source : RHB Research

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