After attending its recent analyst briefing, we now have a firmer conviction on the potential massive synergistic benefits that could be created for both parties post acquisition. In fact, after becoming the major shareholder of TEB, CENSOF intends to introduce some key directors to lead TEB’s board in order to materialise greater strategic benefits on the “combined” assets and resources between CENSOF and TEB. On top of that, we believe the better integration on the enlarged client base between both parties may potentially enhance earnings margin by capitalising on economies of scale and minimising cost leakages to third parties in the future. Noteworthy, we believe CENSOF’s GSTready accounting software (e.g. Max-Paygate) is likely to benefit should the federal government outline the details of GST roadmap in next week’s budget 2014. There is no change in our FY13-FY14 earnings forecast. We are keeping our OUTPERFORM call and TP of RM0.61 based on unchanged targeted FY14 PER level of 15.5x.

Ready to lead TIME. After recently receiving approval from Bursa Malaysia and concurrence from the Securities Commission for the proposed acquisition of TEB, CENSOF had on Friday (11-Oct-2013) made the first balance purchase of approximately RM35.8m to Khazanah to secured 20.8% (of total 43.05%) stakes in TEB, making it an associate of the enlarged CENSOF group. Furthermore, we understand CENSOF, being the majority shareholder of TEB, intends to introduce some key directors to lead TEB’s board in order to materialise greater strategic benefits on the “combined” assets and resources between both parties.

Transaction rationale and strategic fit. Besides products' services synergies, better system integration and economic of scales; the enlarged CENSOF group could also potentially benefit from accessing TEB’s Dagang Net Technologies (DN) enlarged clientele base of over 13k to market and sell its solutions such as FMSS systems. In return, DN could achieve some cost savings from the current commission sharing with FPX (Financial Process Exchange) as CENSOF would be able to complement DN payment gateway with its Max-Paygate system. As a result, the better integration on the enlarged client base between CENSOF and TEB may potentially enhance earnings margin by capitalising on economies of scale and minimising cost leakages to third parties in the future.

Budget 2014 could benefit GST-ready solutions. The group’s GSTready accounting software is likely to benefit should the federal government outline the details of GST roadmap in the upcoming budget 2014. Should that be the case, CENSOF has the ability to offer GST payment services via Max-Paygate to DN's (which TEB has 71.2% equity interest) 13k customers base as value-added service. On top of that, the group’s GST-ready accounting software and training services are on the table to offer to their existing over 80 government agencies in the country.

Neutral on potential concessionaire risk. We understand that there is a risk that DN 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 of over 13k; and (iii) tougher entry barrier for new entrants due to its unique front-and-back end bundle services.

Source: Kenanga