Formis Resources - Acquires 20% stake in Microlink HOLD

- We maintain Hold on Formis Resources Bhd (FRB), with an unchanged fair value of RM0.83/share, based on FY12F core EPS of 7.5 sen on a PE of 11x.

- FRB’s subsidiary Formis Holdings Bhd has acquired a 20% stake comprising 25.5mil shares in Microlink Solutions Bhd from Technology World Company (TWC) for RM4.59mil cash or 18 sen/share. The deal was made via a direct business transaction on 16 May, 2012.

- FHB is also to settle the amount owing from TWC to Microlink’s subsidiary Microlink Worldwide Sdn Bhd  of RM0.45mil. 

- FRB said the acquisition represents a meaningful equity investment in a profitable group of companies whose existing businesses and principal activities complement its existing business and product range.

- The acquisition follows FRB’s recent proposal to dispose of certain core subsidiaries to Microlink for an indicative amount of RM102mil to be satisfied via the issuance of 463.64mil shares in the latter. Following the 20% acquisition, this is now deemed as a related party transaction, for which an independent adviser would have to be appointed.

- In what is essentially a reverse takeover, FRB will end up as the controlling shareholder in Microlink, with a 78.44% stake (without taking into account the recent 20% acquisition). The Microlink shares will be valued at 22 sen each – a premium of 1.9 sen or 9.45% above the five-day VWAMP up to 4 May. FRB would have to undertake an MGO and it intends to maintain Microlink’s listing status.

- The interests to be disposed of are:- 1) 100% of Applied Business Systems Sdn Bhd (ABSSB); 2) 100% of FormisComputer Services Sdn Bhd (FCSSB); 3) 51% stake in First Solution Sdn Bhd (FSSB); and 4) 100% of Formis Systems & Technology Sdn Bhd (FSTSB).

- Notwithstanding our neutral stance, the proposals could be seen as positive for FRB in certain aspects for the long term, subject to effective implementation and cost management:- 1) Assuming control of a smaller listed rival in the IT business, particularly in the financial services space; 2) Deriving better size and economies of scale; 3)  Wider market reach and clientele base; and 4) penetration into the banking industry, given Microlink’s expertise in banking software and solutions.  

Source: AmeSecurities