News     The company has proposed an issuance of Redeemable Convertible Notes (“RCN”) with an aggregate principal amount of up to RM100.0m, which will be issued in four tranches. The issuance of the first and second Tranches Notes is  set at RM25.0m each while the third and fourth Tranches Notes will be at the amounts of RM30.0m and RM20.0m respectively. 

The tenure of the Notes is 36 months and is expected to be due in 2016. An interest payment of 2.0% per annum will be payable in arrears on 30 June and 31 December. 

The conversion price is based on either 135% of the 45-day daily traded volume weighted average prices (VWAP) or 88% of the 45-day average closing price. 

The Notes will be privately placed to and purchased by the Subscriber. No offering circular or information memorandum will be issued by the company for the proposed placement of the Notes. The Notes will not be rated and transferable as well as listed on Bursa Malaysia. 

Comments    We believe the proposed utilisation of the proceeds arising from the Proposed RCN issue is to be utilised to fund strategic acquisitions. We even do not rule out that this fund raising is meant for the acquisition of 45.03% stake in Time Engineering Bhd (“TEB”) from Khazanah. Press has lately reported that Censof, Skali Group and My EG are interested in the above Khazanah stake in TEB, of which Khazanah is likely to draw a conclusion on the sale within weeks. 

The jewel in TEB is its 71.25% equity interest in Dagang Net Technologies S/B, which is currently holding a 5-year government contract that will expire in 2014 to operate an electronic customs declaration value-added network  and electronic permits for other government agencies. It is not clear if Dagang Net will get any extensions to its  existing concession at this juncture. 

Assuming all the 43.0m outstanding warrants are fully exercised, Censof’s total issued and paid-up share  capital will be increased to 387.2m. The total enlarged issued and paid-up share capital will further balloon to 656.7m after the conversion of the RCN into Censof Shares. 

The group’s gearing ratio will increase substantially from the current 0.12x (as of end-FY12) to 0.99x after the issuance of the RCN and the full exercise of the warrants but will drop to 0.04x upon the full conversion of the RCN. 

Outlook    While we are positive on the group’s long-term prospect, the upcoming acquisition will be a key earnings wild card for Censoft given the potential huge share dilution from the above RCN. Should the upcoming acquisition be not an earnings accretive deal, it will have a negative impact to the group’s forward earnings. 

Forecast    Our FY13E-14E earnings estimates remain unchanged.

Rating   MAINTAIN OUTPERFORM pending further clarifications by management regarding the RCN instrument and the potential acquisition.

Valuation     We are maintaining our TP of RM0.56 based on an unchanged targeted FY13 PER level of 12.2x.

Risks    Delay in projects revenue recognition.

Source: Kenanga