After a prolific year for initial public offerings (IPO) in 2010, the new year has gotten off to an eventful start with five IPOs so far in January, namedly Maxwell International Holdings Bhd, Asia Media Group Bhd, Benalec Holdings Bhd, K Seng Seng Corp Bhd and Tambun Indah Land Bhd.
Of the five IPOs, Benalec and K Seng Seng have fared well thus far, with premiums of 39% and 8.8%, respectively, over their offer prices. It has not been bad for the other three either, as all are still trading above their offer prices, albeit at low single-digit premiums.
But the biggest gainer has been Benalec. Investors took warmly to the company for its strong market positioning in the marine construction business, a niche industry which offers high margins and few competitors.
The sixth new listing for the year, Century Software Holdings Bhd (CSHB), is scheduled to make its debut on Jan 31. Will the renewed interest in IPOs spill over to CHSB?
CHSB Price Per Earning Ratio
Compared with the other IPOs, analysts say CHSB, an IT-based company, may draw slightly less interest due to the industry’s highly competitive nature, evolving technology and relatively high starting valuations.
While CHSB boasts high profit margins, earnings have been trending down since FY08 ended Dec 31. The IPO’s price of 93 sen also appears slightly on the high side at a 20.2 times price-to-earnings ratio (PER) for 2010, with annualised earnings per share (EPS) of 4.6 sen last year based on its seven-month results.
Based on FY09’s EPS of 5.4 sen, the IPO is being priced at a historical PER of 17.2 times.
A report on Jan 17,SJ Securities Sdn Bhd notes that the average PER for CHSB’s IT-related peers is 12.6 times, based on a sample of nine companies, including Heitech Padu Bhd, Mesiniaga Bhd, Gland-Flo Solutions Bhd and Privasia Technology Bhd.
CHSB Subsidiaries
CSHB is the holding company of two subsidiaries, Century Software (M) Sdn Bhd (CSM) and T-Melmax Sdn Bhd (TMX). CSM contributed to 84% of total group revenue in 2009.
CSM is in the business of software development, implementation, training and maintenance. It focuses on developing financial management solutions (FMS).
Software licensing, implementation, training and maintenance make up a high percentage of its revenue. TMX, meanwhile, is a payment aggregation software (PAS) provider that provides a gateway between corporations and banks.
IPO Purpose
CSHB aims to raise RM21.4 million through the IPO. Of this amount, RM6 million will be allocated to research and development, RM4.9 million for business expansion and capital expenditure, RM4 million for working capital, RM4 million for bank repayments and RM2.5 million for listing expenses.
Current And Future Prospects
CSHB said it expects stable and recurring income from CSM’s business. Being one of two FMS providers in the country that are compliant with the standard accounting system for government agencies (Saga), CSM derives almost all its revenue from the public sector.
For the seven-month period ending July 31, 2010, some 98.5 % of CSM’s revenues came from the public sector or government-related contracts.
The continual renewal of present contracts and fees collected from upgrading and maintenance are sources of recurring revenue.
To date, CSM has implemented its Saga compliant FMS in 62 out of approximately 118 federal statutory bodies. This accounts for 53% of the market share in comparison with the 5% market share of its competitor, Konsortium Jaya Sdn Bhd. CSM has also managed to secure contracts with 22% of the agencies in the federal government.
Despite an already high reliance on the public sector, there appears to be room for growth. With the government setting up guidelines for federal statutory bodies to be Saga compliant, the 49 federal statutory bodies that have yet to implement Saga-compliant FMS represent untapped market potential.
SJ Securities also said the proposed implementation of the Goods and Services Tax (GST) will prompt users to seek efficient FMS. According to CSM, programs incorporating GST calculations have been developed and are pending customisation to comply with regulations.
But being almost fully reliant on the public sector also carries customer diversification risks.
CSM acknowledged that its market share may be affected if there is an increase in the number Saga-compliant FMS providers. To supply to the public sector, however, FMS providers must not only be Saga-compliant, but also have government approval. CSM has an advantage due to its experience in this area.
CSHB said it expects its other subsidiary, TMX, to contribute more to the company’s growth, although it appears the latter’s revenue had been on a declining trend. TMX’s revenue dropped from RM6.3 million in 2007, to RM5.2 million in 2008 and RM4.6 million in 2009.
TMX’s PAS software allows for multiple payments to be made to multiple bank accounts from a single interface.
Apart from marketing to the private sector, TMX also plans to launch an online payment portal connecting corporations with government bodies and organisations.
However, analysts noted that this may overlap with existing services offered by various other parties, including banks and MyEG Services Bhd, the country’s leading e-services provider for government-to-consumer services.
CSHB’s net profit saw a 82% rise in FY08 to RM11.81 million, from RM6.48 million in FY07. After that, net profit decreased by 21.5 % to RM9.27 million in FY09, with EPS of 5.4 sen.
For the seven month period ended July 31, 2010, it posted net profit of RM4.58 million, up 10.6% year-on-year. On an annualised basis, the implied net profit for the full year is RM7.84 million, or 4.6 sen per share.
Written by Raina Ng
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