Censof finally bagged the 45.03% stake in Time Engineering (“TEB”) held by Khazanah. Censof has entered into a conditional share sale and purchase agreement with Khazanah to acquire the latter’s 45.03% stake in TEB for a cash consideration of RM69.82m (or RM0.20/TEB share), subject to the approvals from Bursa Malaysia and Securities Commission Malaysia. Upon completion of the proposed acquisition, Censof will emerge as the new controlling shareholder in TEB and thus will be obliged to extend a conditional MGO (with the conditional acceptance of >50% of the total voting shares of TEB) to other TEB shareholders for a cash offer price of RM0.20/share. We are positive on the proposed acquisition where we believe massive synergistic benefits could be created for both parties. There is no change in our earnings forecast as well fair value of RM0.61, based on the targeted FY14E PER of 15.5x (+1.0x SD). Meanwhile, should the proposed acquisition be concluded by yearend, the enlarged Censof's forecast net profit for FY14 would increase to RM22.2m from the current forecast of RM15.4m based on existing activities. This will boost our target price to RM0.88 based on the above-mentioned targeted FY14 PER of 15.5x. We have raised our Censof rating to OUTPERFORM in view of its potential 26% capital upside from here.

A winner in the Time Engineering (“TEB”) bidding process. The winning announcement marked the end of the TEB bidding tussle where Censof Holding along with MyEG Services Bhd and Skali Group were the main contenders for Khazanah’s 45.03% stake in TEB. The acquisition price of M0.20/share is at a c.29% discount to TEB closing price as at yesterday and represents 1.54x PBV, which we deemed as fair. Funding is not an issue in our view given that Censof had issued RM100m worth of Redeemable Convertible Notes (‘RCN”) in May 2013. We understand that the share sale agreement (“SSA”) is subject to (i) the approval from Bursa Malaysia and (ii) the approval of Securities Commission Malaysia.

Proposed mandatory take-over offer (“MO”) for the remaining TEB shares. Upon completion of the proposed acquisition, Censof will emerge as the new controlling shareholder in TEB with 45.03% equity interest. Under the Malaysian code on Take-Overs and Mergers, Censof will be obliged to extend a conditional MGO (with the conditional acceptance of >50% of the total voting shares of TEB) to the shareholders of TEB at a cash offer price of RM0.20/share. We understand Censof intends to maintain the listing status of TEB.

Rationale for the proposals. Censof believes that the proposed acquisitions will not only allow the group to expand its business but also to leverage on TEB’s resources and infrastructure to create strategic benefits, and thus, will bring both Censof Group and TEB Group to the next level of performance.

Massive synergistic benefits could be created. Apart from the products' services synergies, the enlarged group could also potentially benefit from an enlarged client base, better system integration and economies of scale. Meanwhile, we understand that there is a risk that Dagang Net Technologies S/B (“DN”), in which TEB has 71.2% equity interest, may not be able to renew its exclusive concession with Royal Malaysia Customs (“RMC”) upon its expiration in 2014. Nevertheless, we are not overly concerned about the risk given that: (i) it will be business as usual, even without the RMC concession, (ii) DN posses a strong and solid clientele’s list; and (iii) entry barrier is high for new entrants due to its unique front-and-back end bundle services.

Source: Kenanga