Formis Resources - Reverse takeover of smaller rival - positive for long run 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.

- We have a neutral stance on FRB group’s proposed disposal of certain core subsidiaries to Microlink Solutions Bhd (NR) for an indicative amount of RM102mil to be satisfied via the issuance of 463.64mil shares in the latter.

- In what is essentially a reverse takeover, FRB will end up as the controlling shareholder in Microlink, with a 78.44% stake. 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.

- Formis and its wholly-owned subsidiary Formis Holdings Bhd on 8 May 2012 entered into Heads of Agreement with Microlink for the proposed disposals of the subsidiaries, pending the signing of the definitive agreements.

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

- Apart from FCSSB (which is also involved in systems integration), the other three subsidiaries mainly distribute and resell hardware and software. Collectively, they accounted for about 40% of the FRB group’s revenue and about 20% of its core profit after tax in FY11. However, FCSSB’s two subsidiaries – Formis Automation Sdn Bhd and Formis Network Services Sdn Bhd – will not be part of the disposals. No further breakdowns of revenue and earnings are available.

- Notably, FRB would have to provide a pre-tax profit guarantee for the target companies of RM24mil for the years ending 31 March 2013 and 2014. This could imply that our pre-tax profit forecasts for the entire FRB group of RM13mil and RM16mil for FY13F and FY14F, respectively, are conservative. Collectively, the target companies posted pre-tax profits of only RM2.7mil for FY11.

- Notwithstanding our neutral stance, the proposal 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 much-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