Censof Holdings - Strong growth potential

We visited Censoft Holdings Berhad (“Censof”) recently and re-affirmed our bullish view on its prospects. Management remains optimistic on its Indonesia venture with the aim to derive 20% of its total revenue from the Indonesian market in the next three years, underpinned by its flagship product – Outcome Bases Budgeting (OBB) solutions. The upcoming implementation of Malaysia’s GST may provide a strong catalyst to the group due to its edge in providing financial management solutions. Going forward, Censoft intends to grow its company via M&As rather than relying on just organic growth. Despite lacking a firm dividend policy, the group has continued to reward shareholders since listing with the latest effort being its 1-for-8 free warrant distribution. While we are maintaining our FY12 earnings forecast, we have raised our FY13 earnings estimate by 21% to RM21.8m after realigning projects completion timeframe as well as our margins assumption as per management guidance. In tandem with our earnings upgrade, we have raised our Censof target price to RM0.74 from RM0.61 previously after rolling over our valuation base year to FY13 at an average forward PER of 11.7x.

Management remains bullish on Indonesia venture. Censof’s overseas revenue accounted for 2.1% of the group’s total turnover of RM43.3m in FY11. Spearheaded by its recent acquisition, Praisindo Teknologi, which is 60% owned by Censof and is a leading Investment Management System Solutions provider in Indonesia, the group is eying more than 200 local councils here to provide them with its Outcome Bases Budgeting (OBB) services. OBB is an online budget solution for outcome-based budgeting and is currently used by Ministry of Finance in Malaysia. Censof is currently servicing 40 fund management companies with an access to over 240 banks in Indonesia via Praisindo Teknologi. We understand that management is targeting a RM10.0m revenue contribution from this Indonesian subsidiary in FY12 with a net profit margin of 30%. The guidance appears bullish given its still negligible revenue contribution (~RM1m) in FY11 and hence, we have not factor in any revenue contribution from it as yet in our forecasts.

GST and M&As are the growth catalysts. The implementation of Malaysia’s GST (Government Service Tax) may provide another strong catalyst to the company given that Censoft has an edge in providing FMS (Financial Management Solutions), particularly in OBB services. While the GST implementation date remains vague at this juncture, we believe it will come in sooner rather than later. Meanwhile, we understand that management is currently exploring a few M&As opportunities in several South-East Asia countries but has yet to finalise any solid proposals at this juncture. Censof is of the view that the fastest way to grow company would be through M&As rather than relying on just organic growth.

Net cash and no gearing. In line with management’s prudent stewardship, the group has recorded almost zero gearing since its listing on Bursa Malaysia, thus suggesting that it has ample room to gear up should the group undertake any M&As in the future. As of 1Q12, the group has RM9.9m net cash with a gearing ratio of 0.02x.

1-for-8 free warrant to go ex on 16 July. While the group has yet to set any dividend policies at this juncture, Censof has continued to reward its shareholders since its listing. For example, the group has recently proposed a 1-for-8 free warrant distribution with an ex-date of 16 July. We understand that the warrant exercise price has been set at RM0.46 per share, representing a 8% discount to yesterday’s closing price of RM0.50.

Source: Kenanga