The acquisition of Perfect has transformed PROACTIS into a genuinely global player. However, the company is not resting on its laurels - new CEO Hampton Wall has set out an ambitious plan to continue the aggressive growth through a combination of organic growth and further earnings enhancing acquisitions. This note explains the rationale behind this strategy and assesses its feasibility. If execution continues, there is the potential for further significant value creation.
The importance of absolute scale can be seen in PROACTIS’ acquisition track record. Consolidating sub-scale operators has doubled their profitability. Greater size versus the competition (relative scale) is also important. Higher R&D investment and marketing spend should accentuate PROACTIS’ advantage over its smaller rivals. In a very fragmented market, where just 3ppts of market share currently separate the #3 and #10 players, there is a big opportunity for the enlarged company to improve its competitive position still further.
Our analysis suggests PROACTIS can achieve the average growth of 10% which it is targeting. Its prospects are boosted by a number of specific tailwinds including the potential for accelerated cross selling and exposure to above market growth in business network, Europe and Tier II customers. Longer term growth rates could rise as it rolls out APF and accelerates R&D investment in products with high growth potential.
PROACTIS’ ambition to deliver substantial incremental growth through acquisitions also looks feasible, as it has proved in its track record over the last four years. Whether this comes from another “transformational” move or multiple “tuck-ins”, we believe it can find further deals without compromising on growth rates, visibility and profitability. The presence of competing roll-up strategies may push up prices but also highlights that PROACTIS may itself become a target.
Further acquisitions are not factored into our forecasts but for illustration, assuming a 25% average annual growth rate can be sustained, by FY21E PROACTIS will generate revenue of £118m. Applying an average acquisition multiple (2.8x sales) and a 33% EBITDA margin suggests an adjusted EPS of 18p. We believe this strategy could create significant value over time.