Censof holding an ace in its pack

Published: Saturday September 21, 2013 MYT 12:00:00 AM 

Updated: Saturday September 21, 2013 MYT 7:29:34 AM

ALTHOUGH quite a different animal from the other IT stocks on Bursa Malaysia,Censof Holdings Bhd often draws comparisons with MyEG Services Bhd andPrestariang Bhd, both of whom, like Censof, get most of their business from the Government.

Here is where they diverge: MyEG and Prestariang have leapt considerably ahead of the pack, with their shares returning 144% and 98% on a one-year basis, respectively, compared to Censof’s 30%.

But Datuk Samsul Husin doesn’t need to thumb his nose at the competition. Indeed, with Time Engineering Bhd in the fold, Censof’s fortunes are about to change.

“We expect one plus one to make three,” the firm’s group managing director tellsStarBizWeek.

Censof finally sealed the deal last week with Khazanah Nasional Bhd to buy the state-owned investor’s entire 45.03% stake in Time Engineering for 20 sen a share, or RM69.8mil cash, beating nine bidders, including MyEG and the privately-held Skali Group.

This isn’t the first acquisition for low-profile Censof, but it is by far the biggest and the first involving another listed entity – what more one as storied as Time Engineering.

Samsul declines to go into specifics, but he says Censof isn’t looking to overhaul Time Engineering’s management, outside of board representation and its choice of chief executive.

Khazanah, he notes, already has a roadmap in place for Time Engineering. What’s left is the implementation, Samsul says without elaborating on the details of the plan.

While he assures that Censof and Time Engineering will remain as separate listed companies, Samsul does not rule out a merger down the road, if the opportunity presents itself.

Big step, big risks

Time Engineering’s financials over the past five years have been erratic, with its profit swinging from a loss in 2008 before turning profitable and then slipping back into the red last year.

But look under the hood and things don’t look that grim, Samsul says. Its results in the first half of the year saw a 10.4% boost to the topline, while net earnings went from red to black. The firm’s after-tax margins also rose to 13.2% from just 3.4% against last year.

For Censof, which has a market capitalisation of around RM170mil, analysts say better days are in store for the software-as-a-service provider.

M&A Securities has a target price of 85 sen for the stock, while Kenanga Researchpegs it at 88 sen with an upgrade to “outperform”.

According to forecasts by Kenanga Research, Censof could post a net profit of RM22.2mil in 2014, assuming an RM7.3mil contribution from Time Engineering, despite potential write downs for the latter’s two loss-making units.

Censof’s calling card is its status as a preferred financial management software solutions (FMSS) supplier to the Government. Besides Censof, only one other player,Konsortium Jaya Sdn Bhd, is recognised by the state for the provision of FMSS services that are Standard Accounting for Government Agency-compliant.

Some key contracts held by Censof are the outcome-based budgeting system, valued at RM22.5mil for five years, awarded by the Finance Ministry and used in Budget 2013. It also has jobs with Perkeso and the Inland Revenue Board worth RM33.08mil and RM5.6mil.

Now that Time Engineering is on board, analysts see Censof bundling its services and offering both front and back-end solutions, enabling it to tap a larger pool of clients and raise the barrier of entry, thus fending off would-be rivals.

“Censof currently offers both back-end products and services such as financial management solutions, e-payment gateway services and investment/asset management solutions to its customers whereas Time Engineering offers front-end services such as Database-as-a-Service to its customers,” Kenanga Research says in a note to investors.

“One of Dagang Net Technologies Sdn Bhd’s shortcomings is its lack of a payment engine that is directly connected to the banks. The proposed acquisition would allow Censof’s T-Melmax system to add to the portal run by Dagang Net and to complement and enhance its service with T-Melmax’s payment gateway thus providing a more comprehensive service to its clients.

“We understand that Censof is planning to bundle its financial management solutions and e-payment gateway services with Dagang Net’s myTRADELINK portal. The move could provide a complete trade solution ranging from the front-end (myTRADELINK portal) to back-end services (financial management solutions and e-payment gateway services), which will further raise the entry barrier for new entrants.”

Dagang Net, a 71.25% subsidiary of Time Engineering, is the firm’s most valuable asset because of a 25-year concession it holds with the Customs Department that conducts more than 50 million electronic transactions a year worth RM1.8bil.

Time Engineering draws 70% of its profit from Dagang Net. It has a virtual monopoly to process Customs-related transactions, duty payments and electronic document transfers between the trading community, such as banks, forwarders, customers and port operators, serving a customer base of 13,000.

The concession, which helps Dagang Net maintain a healthy pre-tax margin of 30%, has been cited as Time Engineering’s biggest attraction and the reason for its many suitors.

However, taking over Dagang Net also poses a huge risk: its concession expires next September. On this Samsul is quite confident of a renewal, pointing to the high barrier of entry for such work, the lack of clear-cut competitors and Censof’s own track record with the Government.

Herculean task ahead

Still, no guarantees were given when Censof bought Time Engineering that an extension was in the bag, Samsul says.

In the meantime, Censof has surfaced as the favourite to clinch a sizeable contract from the Government to provide GST-related software services nationwide, as reported by StarBizWeek last month.

Four bidders are vying for the project, including My EG and Brilliance Information Sdn Bhd.

“The mandatory implementation of GST means that Censof will have to adjust the accounting system of its clients, creating a new source of revenue for Censof,” M&A Securities says.

“In addition, thanks to its direct role in proving the accounting services for the Government and Government-related agencies, we opine that Censof will emerge as one of the big winners of Budget 2014.”

On its international operations, Samsul is visibly chuffed by Censof’s progress in Indonesia, where it is enjoying higher margins as a result of the lower cost base there.

The company sells its wealth and asset management software in Indonesia to mainly private clients, such as big banks. Although it has sales offices in multiple countries, its foreign units account for no more than 10% of group profit.

Be that as it may, Samsul thinks the numbers put out by analysts are conservative, and he expects Censof’s profit to grow 30% following the Time Engineering purchase.

Even if Time Engineering turns out to be the toughest assignment of his career, Samsul claims he isn’t losing any sleep. Censof, he stresses, hasn’t reported a loss since it started out in 1997, and he intends to keep it that way.