Proact: Encouraging Improvements in Margins

Research Update

2024-05-13

12:01

Redeye raises its Base Case and forecasts following a strong Q1 report, with the strong gross margin, high new cloud contracts intake, and solid ARR growth being the highlights. While the System sales mix plays a role in the strong gross margin, underlying efficiency improvements also drove the solid number. Proact is close to its 8% EBITA margin target for the first time.

Fredrik Nilsson

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Mix and Efficiency Measures Lifting the Gross Margin

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Strong Gross Margins Boosting EBITA – Close to 8% Target

Sales declined by 2% y/y, 6% below our forecast of 4%. Organic growth was -3%. The volatile system revenue fell 11% y/y, while we expected an increase of 2%. The recurring revenue (Cloud and Support) grew by 11% organically y/y, roughly in line with our expectations. The gross profit was 8% better than we expected, following slightly lower sales but a much stronger gross margin than we anticipated. While the slightly more service-heavy sales mix than we expected motivates a slightly higher gross margin, the outcome of 25.8% (21.7), beating our forecast of 22.5%, was mostly due to strong gross margins within System sales and a result of the efficiency measures taken in 2023. Thanks to the strong gross profit and OPEX only exceeding our forecasts marginally, the EBITA of SEK95m (56) beat our forecast of SEK82m. The EBITA margin was 7.9% (4.6%), above our forecast of 6.4%. 7.9% is a strong level in Proact, and it is the first time the company is close to reaching its 8% EBITA margin target.

Strong Momentum in Contracts Continues

The intake of new cloud contracts was a record high SEK183m (117) for a Q1, mainly driven by BU UK followed by Nordic & Baltics and West. That is a strong number, supporting solid Cloud revenue growth some quarters ahead (there is typically a 6-month lag from signing to revenue, and the contracts usually span three years). While it is too early to talk about a stronger trend in new cloud contracts, we note that both Q4 and Q1 have seen strong quarters, which we have not seen before. Nevertheless, it is encouraging to see solid growth in new cloud contracts and in cloud revenue (+10% organically y/y), as it is the key to higher margins and less volatile earnings.

New Base Case SEK124 (115)

Based on increased forecasts, we raised our Base Case to SEK124 (115). We increased our EBITA forecasts by 2-7% for 2024-2025 due to raised assumptions regarding gross margins, as the efficiency measures seem to have a greater impact than we initially expected. Proact is trading at 8.3x and 7.5x EBITA for 2024-25, respectively, implying a discount of about 5-15% to the median of companies with forecasts on EBITA.

Key financials

SEKm202220232024e2025e2026e
Revenues4,756.94,847.35,045.85,248.25,417.2
Revenue Growth35.0%1.9%4.1%4.0%3.2%
EBITDA479.6466.6556.1575.6601.1
EBIT272.5250.9310.5314.9351.9
EBIT Margin5.7%5.2%6.2%6.0%6.5%
Net Income203.2194.3222.9224.0252.5
EV/Sales0.50.50.60.50.5
EV/EBIT9.310.09.99.07.3

Mix and Efficiency Measures Lifting the Gross Margin

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Contents

Mix and Efficiency Measures Lifting the Gross Margin

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