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.
■ 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
Labels: IPS Securex Holdings, Technology Sector