S5H is a 20%-owned investment of MyEG Capital Sdn Bhd (“MCSD”), a wholly owned subsidiary of MYEG. On the other hand, S5H wholly owns its operating unit, S5 Systems Sdn Bhd (“S5”). MYEG has invested in total RM176.5m, with the last valuation at RM865m in Dec 2021 (the first valuation of 10% was at RM900m valuation in June 2020). Both acquisitions were not subject to Bursa Securities and shareholders’ approvals as they did not trigger the pre-determined percentage ratio of the Main Market Listing Requirements of Bursa Securities. It was stated MYEG intends to leverage the relationship with S5H to achieve greater synergies and mutual benefits and expand the company’s footprint in Malaysia as well as strengthen its position as an e-government services provider. It was disclosed via an article by The Edge dated 23 March 2021, the shareholders of S5H at that point of time were Syed Mohammad Hafiz (76.38%), MCSD (10%), Merrington Assets Ltd (10%) and Avocat Sdn Bhd (3.62%).

It was not made known the actual reason for the acquisition as MYEG typically into organic growth by expanding into new products, services, customers and verticals i.e. health-tech services, blockchain initiatives, global presence and partnership etc. Interestingly, it has entered a niche e-commerce space via an online platform “Nak Beli” specifically to sell groceries, fresh and frozen food. Hence, the acquisition of S5H by MYEG was a peculiar one as it does not add value to its current businesses nor strengthen its footprint in Malaysia and giving the Group greater synergies with S5H. Its strength does not lie in its M&A prowess but its internal expertise and capability to build, operate and own platform and to offer various services  from government agencies (i.e. PDRM, JPJ, JIM, JPN etc.) to Malaysian citizens and businesses. Hence, this acquisition indeed raised a red flag.

Based on the publicly available sources, S5’s principal activities are in the provision of national security solutions to the government agencies, namely to Immigration Department of Malaysia ("JIM") in relation to the services It was stated that the Company has three (3) contracts namely, the followings:-

(i)             National Enforcement and Registration System (“NERS”), a 12-year concession from June 2011 to June 2023 to record and monitor the immigration of foreigners in Malaysia as well as to issue the Visit Pass (Temporary Employment) (PLKS);

(ii)           I-Kad – A contract of identification document issued to the foreigners, including expatriates without having to carry their passport; and

(iii)          Immigration Security Clearance (“ISC”), a mandatory biometric security check at ISC centres of their respective countries for foreign workers, before the visa issuance at Embassy Malaysia.    

It was noted that S5 is facing many issues since 2017 as follows:-

(i)             Withdrawal of several corporate proposals, including of acquisition of S5 for RM900m by Goodway Integrated Industries Bhd announced in Feb 2017 due to enhance disclosure and information requirement;

(ii)           ConnectCounty Holdings Bhd, a cable and wire manufacturer has ceased all negotiations pertaining to possible reverse takeover exercises involving S5;

(iii)          On 16 Jul 2020, the wholly-owned holding company of S5, S5 Holdings Inc was seeking a backdoor listing via Ancom Logistics Bhd (“ALB”). Subsequently, on 13 May 2022, it was aborted and refundable deposit of RM10m would be payable to ALB by end of Dec 2022;

(iv)          From the searches via Companies Commission of Malaysia (“CCM”), the net profit and net assets of S5 for the FYE 30 June 2019 are RM63.4m and RM21.7m respectively and for the FYE 30 June 2020 are RM28.6m and RM50.3m respectively. It was not sure why the net profit decreased from RM63.4m to RM28.6m from FYE2019 to FYE2020. However, there are no audited accounts that have been lodged since then. What was the reason behind the late lodgment of audited accounts?;

(v)           Based on the article “Datasonic confident winning i-Kad Solutions deal from govt” released on 3 February 2021.  With the statement by Datasonic, it indicates that the i-Kad project has expired and is undergoing retender process;

(vi)          Legal tussle with Iris Information Technology Systems Sdn Bhd (“IITS”), a wholly owned subsidiary of Iris Corporation Bhd in relation to the National Integrated Immigration Contract. However, the application for an interim injunction filed in by S5 against IITS was dismissed by the Kuala Lumpur on 5 May 2022, with costs of RM30,000 payable to IITS;

(vii)        It was raised by DAP lawmaker, Steven Sim that he discovered a huge discrepancy in the amount paid to NERS versus the number of PLKS issued, based on the checks of federal estimates and the federal government’s financial statements;

(viii)      Earnings are very lumpy are dependent on the acquisition, expiry and renewal of projects. With the expiry of its two (2) core projects, namely ISC and I-Kad and with NERS project at tail end i.e. its final year, it may trigger issue of sustainability and resilience of its business. There was a plan of S5 to build its other verticals, by expanding its customer base and contract through ventures into new industries but not sure how the plan pans out;

(ix)          As announced on 1 Jun 2022 in Bursa Malaysia, S5’s Chief Executive Officer (“CEO”), Fang Kok Hong had been appointed as the CEO of Cuscapi Berhad effective from 1 June 2022. Reason for leaving S5 was not disclosed in the said announcement; and

(x)            From the unknown sources, S5 is having financial issues due to its high concentration of contracts with JIM. The pandemic has exacerbated their financials and cashflow issues not only due to low volume of foreign workers coming to Malaysia but its ability to preserve its existing contracts with JIM. Currently, it is undergoing a restructuring exercise to turnaround its operations, including retrenchment, furlough and salary cuts exercise to avoid possible of going concern issue.

All in all, many shareholders and investors of MYEG want to know the rationale of sizeable acquisition as the acquisition of S5H stake piqued a lot of interest. Over the years, the Group has proved itself that it has been able to overcome perception not only having its existing contracts renewed but getting new contracts in Southeast Asia and Southern Asia. Overall, the Group growth story remained compelling, robust and unique driven by its entrepreneurial founder.  One thing that haven’t been proved, is its prowess in M&A activities.

The more concerning area is its investment in S5H. Why opt for a backdoor listing instead of direct listing? Unless S5 does not meet the earnings track record for direct listing. What were the reason for deteriorating financials and cashflow of S5 or because of the expiry of contracts or contracts reaching tail end with JIM. If this is the case, is the RM865-900m valuation paid by MYEG reasonable? Notably, S5 has its fair share of other issues including the expiry of contracts or at the tail end, declining financials, legal tussles, resignation of its CEO, timely lodgment of audited accounts etc.

If the valuation for 20% stake in S5H is not justifiable due its issues, is there a plan for MYEG to resell its stake via trade sale or exercise its put option to the vendors of S5H. This is something that MYEG needs to consider avoiding any future write-off or impairment exercise, if any. In a nutshell, price and value aren't always the same same. Don't pay too much especially in a deal that not everyone can understand. This is something that the Company needs to explain to the shareholders. 

Happy investing and stay safe :)