MYEG’S acquisition of S5 stake draws interest
Market questions whether the purchase price is justified
MYEG Services Bhd’s announcement this week of an acquisition of a little-known company has piqued interest.
MYEG said it will purchase 118 million shares or a 10% stake in S5 Systems Sdn Bhd from Merrington Assets Ltd (MAL) for a total purchase consideration of Rm90mil.
This values S5 at a massive Rm900mil. So is this planned purchase justified? MYEG has said that S5’ solutions and systems are “complementary to the company’s existing and prospective service offerings, especially within the immigration space in Malaysia.
“The company intends to leverage the relationship with S5 to achieve greater synergies and mutual benefits,” it has said.
According to news reports, S5 is in the running for the Rm1.5bil National Integrated Immigration System (NIIS) project.
The Rm1.5bil contract for this project is of interest since it also involves the Immigration Department’s IT systems, which are matters of national security.
But some questions remain. For one, who is the owner of MAL.
And secondly, why did MYEG need to fork out the Rm90mil to acquire such a small stake in S5? If it is hoping to team up with S5 to bid for projects, why can’t it just sign collaborative agreements for it?
MAL has several shareholders: Vent Millions Sdn Bhd (25%), Barolagun Sdn Bhd (25%), Venstraits Sdn Bhd (20%), Matrix Indeks Sdn Bhd (16%) and Sinar Estet Sdn Bhd (14%).
The directors of MAL as disclosed to Bursa Malaysia are Rizwan Rasid, Thamilarasan Ramasamy, Muhamad Azril Ahmad Rozi, Darul Ehsan Ahmad and Sasikumar Loganathan.
However, further checks on these companies that own MAL did not reveal any names at all and involve British Virgin Island (BVI) entities.
The Rm90mil price tag values S5 at a trailing price-earnings multiple of 14.2 times S5 earnings.
S5 has net assets amounting to Rm21.7mil and it registered Rm63.2mil in net profit for its financial year ended June 30, 2019 (FY19), according to the Bursa Malaysia filing.
On top of the Rm90mil purchase price, MYEG and MAL had also entered into a putand-call option agreement that will allow MYEG to sell back the entire 10% stake to MAL for about Rm90mil before deducting any dividend from S5 while MAL also has the option to buy back the 10% stake in S5 from MYEG for a similar amount.
But says a MYEG spokesperson: “MYEG has taken many non-controlling stakes in stronggrowth companies with synergistic business and this is no exception. S5 is a company that specialises in border control and we are teaming up to bid for the NIIS project,” he said.
A check with the Companies Commission of Malaysia indicates that S5’ biggest shareholder is NSA Technology Sdn Bhd.
NSA owns 76.4% of S5 Holdings and its wholly owned unit S5 Systems.
According to a filing with Bursa Malaysia, S5 Systems is in the business of national security solutions which involves the provision of security technology intellectual property, the development and customisation of solutions and systems, consultancy and support in all related information technology and security industries.
S5 Systems has been in the public domain before, back in July 2016 when rubber products maker Goodway Integrated Industries Bhd had then proposed to acquire S5 for Rm900mil.
It was proposed then for the Rm900mil purchase price to be effected with an issuance of new shares in the listed Goodway that would have seen the entry of a new majority shareholder, NSA Technology Sdn Bhd.
NSA Technology was supposed to have emerged as a 94.2% shareholder in Goodway then.
But some seven months later, the proposed acquisition had been withdrawn due to additional time that was needed to enhance the disclosures and provide the required information. Maybank Investment Bank Bhd, the bank that was involved in the deal, had then submitted the relevant documents to the Securities Commission some six months after the proposed acquisition was announced to the public in July 2016.
The announcement then had also stated that Maybank Investment and Goodway had mutually agreed for the services of the investment bank to be terminated with immediate effect.
Starbizweek had, in early 2017, highlighted the matter with this turn of events that led people to wonder why Maybank Investment had suddenly withdrawn from such a deal after having worked on it for so many months.
Other questions that surrounded this aborted deal were: what were the additional disclosures that had been required by regulators then that had most likely led to the ultimate withdrawal of the proposed acquisition.
Back to the current proposed deal, it is slated to be completed in third-quarter 2020 after getting the necessary approvals from Bursa Malaysia and other relevant authorities.
CGS CIMB in a report says it is keeping its earnings forecasts pending completion of the deal and reiterates a “hold” call with an unchanged target price of RM1.46.