A Christmas Gift from Systech Bhd?

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Systech Bhd, the e-business solution and cyber security solution company, had been active in merger and acquisition (M&A) since 2023 to enhance the company’s growth.

Just before Christmas, the company had announced a multiple proposal that could propel the company further.

To begin with, the company had announced a issuance of new shares of up to 144.0 million shares to raise approximately RM51.84 million in cash, at 36.0 cents per share.

Honestly speaking, Systech has been losing money for the past 4 financial years, and the NTA of the company is just standing at 5.86 cents per share, so why are there people that are investing in the company?

Interestingly, the company had already secured the takers for the issuance of shares, which is as below:

One of the subscribers of the placement, is in fact the largest shareholder of Systech, which is also related to a private fund, Sea Capital LP. Beyond that, Lim Chin Horng, the substantial shareholder for another public listed company, Econframe Bhd, is also investing into the company, and moreover, another well known IT company — MDT Innovations Sdn Bhd, also had vested interest in this case.

This is not the end — there are another 2 board members of public listed companies, Lee Choon Hee, who is the executive director for Paragon Union Bhd and executive chairman of Scope Industries Bhd.

Interestingly, another CEO of a company that is in the IT field, Data Ascent Sdn Bhd, had taken up their issuance of new shares.

Lamsco Properties Sdn Bhd, which is in wholesale and real estate activities, had seen their director invested in the current round of the placement too.

The big question here again is, why do these people inject fresh capital of RM51.84 million into the company?

Based on the announcement, the cash is used for “Cash Consideration”, which we will talk about shortly.

But the portion of RM6.0 million, shall be used for payment for acquisition of Talentcloud AI Sdn Bhd, which will provide a net profit guarantee of RM1.5 million per year to Systech for the next 2 financial years.

As for the working capital, Systech IOT Solutions Sdn Bhd, a wholly owned subsidiary of Systech, had secured an agreement with 3 hotels in Indonesia for the implementation of tracking and tracing on the invested linen using radio frequency identification (RFID), but this is just the starting point of the subsidiary, with the first exposure into the Indonesia market, the working capital is essentially a war chest for them to prepare for what is upcoming in the market.

To be fair, the subscribers of the placement shares are all savvy people in the business, hence I doubt they will be interested in the company if it wasn’t attractive.

Next, onto the “Cash Consideration” we mentioned earlier.

Systech, once again will acquire another technology company for a total purchase consideration of RM75.0 million, where the RM20.0 million cash shall be settled via the funds raised earlier, and the rest of it would be via issuance of 152.78 million Systech shares at 36 cents per share.

Note: If you had noticed, the costs of the big shareholders is approximately at 36 cents per share, if you are able to buy the company around this level, your risks are pretty much low.

Based on the information provided in the announcement, Wilstech is a provider of business-to-business (B2B) IT solutions that include web solutions, development of custom web and mobile applications, platform supports, IT infrastructure solutions, IT administration and outsourcing, as well as supply of IT hardware, plus, they have their inhouse software called WilsONE which is a business automation software.

The company, currently still enjoys the Malaysia Digital Status, does actually have Securities Commission MYCIF via Maybank Trustee Berhad as investor.

Notably, Wilstech website also shows Pusat Ekonomi Digital (PEDi), Tenaga Nasional, TM, MPSJ, JKR, Guardian, and Giant as their clients.

In terms of numbers, Wilstech would provide a net profit guarantee of not less than RM5.0 million for the next financial year, which is from 1st April 2024 to 31st March 2025.

And if you add up the numbers from Talentcloud AI, Systech is poised to deliver RM6.5 million in net profit for the next financial year, which is a huge leap from their previous loss making stance.

But to mitigate the risks of Systech, the company would “retain” RM30.0 million as security for the performance of the said profit guarantee, and based on the net profit guarantee of RM5.0 million, this represents a PE multiple of 15 times.

This valuation, if compared to the 3 other existing listed companies, such as Ramssol Group Bhd (19.5 times), Agmo Holdings Bhd (25.5 times), and FSBM Holdings Bhd (53.9 times), is definitely not expensive.

Based on the financial numbers of Wilstech and the growth trajectory of 37.24% in terms of net profit CAGR, the RM5.0 million net profit guarantee is definitely achievable.

Beyond that, Systech would also issue 1 free warrant on the basis of 4 existing Systech shares held on the date determined later, at which the exercise price of such warrants has been fixed at 50 cents (another hint?) to reward shareholders.‌

As much as the overall positive note on the proposal for Systech to turn profitable and leverage on different acquired companies’ client portfolio, there is an employees’ share scheme (ESS) of up to 15%, which understandable, is not favoured by investors.

But to be fair to Systech, the IT industry is a highly competitive industry, in terms of retaining talent. To preserve cashflow for the future growth of the company, it is very important for the company to think of other ways to reward their employees, and ESS is one of the better ways to do it to preserve cash flow, and ensure the stickiness of employees.

With the whole proposal in hand, this is indeed a Christmas present from the company to existing shareholders.

But for those who have not invested?

Perhaps you might need to wait for a retrace back to 40 cents level (approximately 10% premium from the placement in the proposal) to be on the safer side.

But with the announcement of free warrants, the share price might hike even higher.

Important: I had personally invested in the company at the cost of 32 cents, so take note of your own risks!