'Dislike' - Systech (High PER, 30 mil New Shares Issued) ... KK

Systech: Systech has three (3) operating subsidiaries :-

(i) Syscatech Sdn Bhd (“Syscatech”), which is principally involved in software solutions to the members’ centric industry such as the direct selling industry and retail industry;

(ii) Mobysys Sdn Bhd (“Mobysys”), which is principally involved in franchise software system; and

(iii) SysArmy, which is principally involved in Big Data Analytics and related applications focusing on cyber security services. SysArmy is 51% owned.

Financial Highlight

The group reported net profit of RM2.71 mil for the FY ended March 2017. Based on market cap of RM95 mil, PER is 35 times.

(a) The group derived 50% of its revenue from overseas, most of which is from North Asia (China);

(b) Traditionally, e-Business (Syscatech and Mobysys) accounted for 2/3 of revenue. However, in two quarters (ended March 2017), Cybersecurity business started maturing, contributing closed to 25% of revenue (they secured more customers);

(c) Not only revenue, Cybersecurity division has also started contributing to operating profit in latest two quarters (RM0.23 mil out of RM0.49 mil in quarter ended March 2017). However, there is earning leakage due to 49% MI.

M&As

On 10 April 2017, Systech proposed to acquire 51% equity interest in Postlink Pte Ltd for RM9.8 mil. Postlink provides services to SGX listed companies for their annual reports. It has a proper profit track record.

In the FY, Postlink reported net profit of RM1.16 mil. This translates into transaction PER of 16 times. Based on 51%, Systech's portion of Postlink profit is RM0.59 mil. This is not a small amount as it is almost 22% of Systech's FY2017 total net profit of RM2.71 mil.

The consideration is to BE satisfied by RM1.6 mil cash and 30 mil new Syatech shares issued at 27 sen per share. The acquisition will be earning accretive.

On 25 May 2017, Systech is acquiring 50% equity stake in Rofarez Solution for RM1.5 mil. Rofarez provides accounting and finance software through Cloud technology. It reported PAT of RM0.16 mil in FY2015. Systech will book in PAT of RM0.08 mil based on 50% equity interest.