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DeClout: Scale And Innovation Pilots Growth
Corporate Digest, Featured | 29 July 2014
By: Peter Ng
Articles (81) Profile

By far and large, the mentioning of these two alphabets, “I” and “T” which are abbreviations of the term, information technology, will cause an investor to react in two ways that are on entirely different sides on a spectrum.

First, reacting in fear in reminiscence of the dot com bubble burst which happened in 1999, where hundreds of IT companies were swiped off the map, consequently dragging the NASDAQ index from a high of more than 5000 points to 1100 points over a horizon of two years.

In contrast to the trial of fire, there exists a space where e-businesses such as social media network, Facebook and the impending listing of China’s e-commerce giant, Alibaba, transformed themselves into successful enterprises that are nothing short of awe-inspiring.

Shares Investment’s research team has re-visited DeClout, a company that provides a wide array of IT services and solutions spanning across its two main business segments, IT infrastructure services and Vertical Domain Clouds (VDC).

IT Infrastructure Services
Representing the first twin engine of growth, IT asset recovery and independent maintenance services is the core pillar of DeClout’s IT infrastructure services business segment.

This segment recorded more than 95 percent of the company’s revenue in FY13 and includes enterprise cloud and managed services as well as turnkey telcom and network infrastructure services.

As the name suggests, IT asset recovery refers to the process of acquiring unused, pre-owned, or end-of-life IT equipment from a user, where refurbishments and customisations are performed on them, before they are resold to another party, maximizing the value through effective reuse.

On hindsight, the simplicity of the business could pose questions on the intensity of competition and the sustainability of its business.

Despite this being a valid question to ask, one needs to understand the operating challenges for a new entrant who attempts to replicate a similar business to DeClout’s IT asset recovery and maintenance business.

Extending Its Global Reach
Firstly, the IT asset recovery business is one where size and scale matter.

By commanding a global network in its IT asset recovery business, this allows DeClout to provide quicker turnaround during the sourcing of data centre equipment and a more extensive inventory of equipment to fulfill its clients’ requirements.

Procurri Corp is also able to leverage on its global inventory and provide the parts required for multi-continent maintenance coverage to large MNCs with a global footprint, generating greater synergies and economies of scale for the business. As such, this is a business that has significant barriers of entry at a global level.

DeClout’s global presence in the United States, Europe and support coverage extending to 16 countries in Asia Pacific, presents the key to overcoming this challenge.

This is accomplished through its subsidiary, Procurri Corporation which has four other subsidiaries under its wing, namely Procurri LLC, Tinglobal Holdings, ASVIDA® Asia and Verity Solutions.

Innovating The Traditional Value Chain
Traditionally, the value chain for the procurement of IT equipment involves several tiers of middlemen if customers go to alternative providers, ie, non-OEM manufacturers.
With more levels of middleman involved, higher prices will be paid by end users as these costs are often passed on to them.

With more companies opting to consider alternative providers, this creates a market gap which Procurri Corporation is able to successfully fill.

As an independent distributor of IT equipment, Procurri Corporation is able to eliminate the multi-tier middlemanship involved by sourcing for retired IT equipment directly from the manufacturer.

These equipment are retired for several reasons such as cancelled orders, distressed situations and equipment left unused for demonstration.

Despite being unused most of the time, they are labelled as ‘pre-owned’ so as not to conflict with the equipment manufacturer’s sale of brand new IT equipment.

Procurri Corp’s remarketing expertise ensures that these equipment can be re-deployed across multiple geographies, giving financial returns related to the resale of equipment in secondary markets.

Drawing on its engineering expertise in IT services, additional customisations as well as value-added services such as maintenance and around-the-clock technical support can be provided to its clients.

The end result is the creation of a cost-effective and integrated one stop solution for DeClout’s clients seeking to manage and optimise the value of their data centre infrastructure.

Coupled with the economies of scale generated by its global reach, client orders are not constrained by location and size, and can be fulfilled relatively fast.

Investment Merits

Source: Company Annual Reports
  • Growing revenue accompanied with healthy profitability in its IT infrastructure services business
  • Strong management team with a proven track record to pilot growth
  • According to Voyage Research, Procurri Corporation is estimated to have an enterprise value of $100 million and a potential spin-off in 2016 could unlock value for DeClout

Investment Risks

  • As DeClout remains in its growth stage, dividends are not expected to be distributed
  • A growing level of operating expenses is an area where the company needs to manage
  • Inorganic growth through acquisitions could put a strain on the company’s resources

SI Research Takeaway
The aggregate of all factors that were mentioned, creates a competitive advantage for DeClout in its IT asset recovery business segment. This will allow the company to at least maintain or grow the current operating performance of the company, as it gears up and grows its second growth engine in VDC.

Backed by a strong interest in investments, Peter's research spans across a range of industries, with his focus placed on companies listed on the SGX.

Please click here for more information about this author.

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