DeClout

DeClout: riding on the pervasiveness of cloud Cloud services are increasingly being adopted by organizations and individuals alike. Benefits include, - little or no capital expenditure for expensive hardware, hence also no need to worry about system maintenance/ upgrades, - flexibility to scale computing resource needs at any time, - variable pricing based on usage. DeClout, as a cloud specialist, offers a play on this structural theme. DeClout’s core business is in IT Infrastructure Services ($51.3m revenue, 97% of sales). Under its Asvida brand, DeClout offers private cloud services to corporates, covering their IT service needs pertaining to infrastructure, platform, network, storage, etc. Segment gross margins at c.30% are high compared to peers at 8-15%, thanks to synergies with its Asset Recovery services, which assists corporates with IT hardware disposal. This enables DeClout to procure secondary equipment and parts cheaply. The inventory is spruced up, and then sold for a profit or capitalized as an asset to support its cloud infrastructure. Besides servicing corporates like Deutsche Bank and SIA, DeClout benefits from the outsourcing of orders from IT giants like IBM and HP. Segment revenue growth has been decent, at $15m – 18m in each of the past two years, translating to growth of 96% in FY11 and 41% in FY12. Management is optimistic on expanding segment revenue further, given the recurring nature of IT maintenance contracts, and the current low revenue base. Over the longer term, management believes its Vertical Domain Cloud (VDC) platform – currently focused on games – will be the growth kicker. As of now, business activities involve games hosting, which generates the bulk of $1.8m segment revenue. To move up the value chain and monetize the platform, DeClout intends create a Games eco-system with online payment and community networks. This will be rolled out in multiple languages across SE Asian markets, beginning with Singapore, Malaysia, Indonesia and Thailand. The platform will support both PC and mobile games. Initial launch is expected to take place in 2H13 with full services expected by 2014. If successfully executed, DeClout could find itself well positioned to capture a share of the SE Asian gaming market that is expected to grow to US$1b comprising 117m gamers by 2016, according to Niko Partners, which specializes in Asian games market intelligence. At $0.28, DeClout trades at 25.2x P/E (excl. IPO expenses). This compares with its closest peer Shanghai DragonNet (300245 CH) which trades at 23.1x. Singapore IT peers like CSE, Ace Achieve which offer traditional systems solutions, trade at lower valuations of between 7-10x P/E.