Formis Resources - Blip due to delay in securing of jobs HOLD

- We maintain Hold on Formis Resources Bhd (FRB), with an unchanged fair value of RM0.83/share based on a downward revised FY13F EPS of 7.5 sen (vs. 7.9 sen/share previously) on a PE of 11x, as we roll over our valuation base. 

- FRB posted a net loss of RM11.2mil for FY12 vs. our forecast of a RM9mil profit, partly on the back of delays in the securing of new jobs resulting in a 5.2% decline in revenue, while net operating cost rose 1.4%.

- We estimate that it had secured about RM260mil worth of new jobs in FY12 vs. our estimate of between RM300mil and RM350mil annually. As at 31 March, 2012, FRB’s outstanding order book totalled RM100mil and it was bidding for RM908.27mil worth of jobs. 

- Among the jobs that may have been delayed, particularly in systems, is the government’s decision on the maintenance job for the first phase of the e-court project as well as the second phase contract. It has been reported that the second phase of the e-court project could be worth between RM150mil and RM250mil. 

- Given its historical strike rate of 25%, we believe FRB will be able to secure new jobs to the tune of over RM300mil annually. Year-to-date, it has secured RM140mil worth of contracts.

- Nonetheless, we have tweaked downwards our earnings forecasts for FY13F to RM14mil (-4% vs. our earlier forecast) and by a further 18% to RM14.1mil for FY14F given its volatile growth path. We introduce FY15F earnings at RM18.6mil.

- FRB has recently proposed to dispose 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 at 22 sen/share.

- In what is essentially a reverse takeover, FRB will end up as the controlling shareholder in Microlink, with a 78.44% stake.  FRB would have to undertake an MGO and it intends to maintain Microlink’s listing status.

- 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 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