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Monday, September 25, 2017

Systech banking on recent buys for growth, to secure bid for large projects

Author: TechnoBrokers | Publish date: Mon, 25 Sep 2017, 08:11 AM

SHARES of ACE Market-listed Systech Bhd have been climbing steadily in the past year, hitting an all-time high of 43.5 sen on Aug 1, with traded volumes surging to be among the top-most active counters in the past two weeks.

Perhaps, it is the company’s recent slew of acquisitions, although not well-publicised, which caught the eye of investors. The acquisitions will enable Systech to expand its solutions offering, geographical reach and clientele - positioning itself as a key technology player.

“If you look at it, our M&As [mergers and acquisitions] are to enable us to build a complete ecosystem, with each pillar in place; from principally offering proprietary software solutions to cybersecurity, and now towards mailing services and eventually e-logistics,”

Nonetheless, some market observers may deem Systech’s valuation, at 51 times price-to-earnings (PE) multiple, expensive. This is based on its 2017 financial year ended March 31 (FY17) earnings per share (EPS) of 0.86 sen.

Tan, however, is not too concerned.

“We believe there is still a lot of growth potential for the group going forward, in all aspects of our business. In fact, we are still aiming for a double-digit growth [in our net profit and revenue] this FY18 and FY19,” he says.

This is driven by a ramp-up in its cybersecurity business (under its 51%-owned SysArmy Sdn Bhd), continued growth in its existing e-business segment, as well as additional revenue from its two recent acquisitions – Postlink Pte Ltd and Rofarez Solutions Sdn Bhd.

Deal accretive

Shareholders have recently approved Systech’s 51% stake acquisition in Postlink – which is in the business of annual report mailing and publication mailing services – for RM9.8 mil.

This will be satisfied via a combination of RM1.6 mil in cash, and issuance of 30.4 million new Systech shares at 27 sen per share – which is at a slight premium to what its shares were trading at in March when the announcement was made.

Meanwhile, the share issuance represents almost 10% of the group’s present share base.

The deal was done at a PE multiple of 16.7 times, and EV/Ebitda of 12.1 times.

Tan, who presently controls 57.2% in Systech via Leinet Technology, says this proves a better option than incurring borrowings for the acquisition.

“When the deal was negotiated, Systech’s PE was approximately 70 times. Having a larger capitalisation for the group will also be beneficial in light of its strategic business plans moving forward,” he explains.

As at March 31, Systech stood in a net cash position of RM1.1 mil, after deducting total borrowings amounting to RM6.2 mil.

Postlink poised to grow

Postlink’s existing business is poised to grow, Tan says, following the Singapore Stock Exchange’s (SGX) requirement that all listed companies must publish a sustainability report at least once a year, no later than five months after the end of each financial year.

The new requirements take effect for any financial year ending on or after Dec 31, 2017. For the first year, firms will be given up to 12 months from the end of the financial year to publish their reports.

Companies may choose to include the sustainability report in their annual reports or to issue it separately. Currently, a corporate social responsibility report is not mandatory.

As such, Postlink will likely to gain from having to mail out two reports.

What’s also exciting for the company is the trend towards e-annual reports.

“Gone will be the days where annual reports are sent in CDs. Our role is to provide software solutions to convert annual reports into a digitised format where it is more interactive [with embedded videos and such] while ensuring a secured electronic delivery to shareholders,” Tan says.

The company targets to roll this out by the middle of next year, with plans to offer e-annual reports to Malaysian-listed companies at a later stage.

“Once that is done, we then look towards digitising proxy forms where shareholders can fill them and sent it back electronically to the registrar. This saves time and effort.

“And our final phase is e-logistics. We intend to develop a platform-based solution to take advantage of the inefficiency in the mailing and logistics industry, particularly in the delivery of physical goods for third party e-commerce platforms,” he adds.

Rofarez to complement existing business

Last year, Postlink handled 264 of 757 listed companies on the SGX, giving it a market share of 35%.

It is worth noting Postlink had been profit-making the past three years. In FY16, it reported a net profit of RM1.1 mil on the back of RM11.4 mil revenue.

On May 25, Systech acquired a 49.9% stake in Rofarez Solutions – which delivers cloud-based financial solutions to businesses under the brand name “DappleWorks” – for RM800,000.

While Systech’s recognition from Rofarez’s FY16 net profit of RM158,000 is minimal (at RM79,000 – around 3% of its current earnings), Tan says the gem lies in Rofarez’s capability to complement Systech’s existing business while allowing it to broaden its product offerings.

“Rofarez’s expertise lies in platform building and one of the biggest concerns of platform companies today is cybersecurity. Imagine if this platform is certified by SysArmy, it will provide reliability to the platform and potentially open up more cross-sell opportunities for us,” he explains.

In five years, Tan expects Systech to derive one third each of its revenue from e-business solutions, cybersecurity, and e-logistics.

Cybersecurity revenue could double

In the immediate term, Systech’s growth will come from its computer security service provider, SysArmy.

Tan expects cybersecurity to contribute up to half of its revenue in FY18, from 20% in FY17. Systech posted a higher net profit of RM2.73 mil in FY17 from RM1.23 mil in the previous year on the back of higher revenue of RM15.23 mil versus RM11.34 mil.

Systech’s core e-business solutions segment – providing proprietary software solutions to mostly direct selling, multi-level marketing and retail companies – accounted for the remaining revenue of RM12 mil.

As Tan also anticipates this segment to post a growth, albeit at a slower pace, this means its cybersecurity revenue this year could double from RM3.1 mil in FY17.

“We are bidding for a few large projects for SysArmy, which we are hopeful to secure some by Q2 [FY18] this year. Ever since the breakout of WannaCry, we have seen an increase in demand for our cybersecurity services,” Tan says.

He adds, SysArmy has been working closely with the relevant authorities, along with CyberSecurity Malaysia to provide awareness campaign to its clients as well as the public.

CyberSecurity Malaysia is the national cybersecurity specialist centre under the purview of the Ministry of Science, Technology and Innovation.

That said, while traction has been rising, Tan acknowledges more could be done and the take-up rate could be faster, as corporates are still not as receptive.

Overall, Tan expects its net margin to hover at 20%.

Systech’s earnings came down in FY16, having invested heavily into its cybersecurity division, which it acquired in 2015. Net margins fell from almost 30% in FY15 to 11% in FY16 but rebounded to 17% in FY17.

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