We are positive on ITMAX System Bhd (ITMAX, stock code 5309) proposed acquisition of 70% stake in Aim-Force Software SB (AFSSB) which expected to boost its future earnings. Coupled with the recent contract extension of an additional 300 traffic junctions and the penetration into smart healthcare, we reckon ITMAX to propel its net profit to RM74.3m and RM86.0m for FY24 and FY25, further bolstered by its order book totalling RM607.3m. BUY with a TP of RM1.88 based on 26x PER (average PER of its regional peers of similar capacity and market cap) over FY24 EPS.

The acquisition of AFSSB, an ICT solution provider, is expected to aid ITMAX in expanding its current services and product offerings horizontally both geographically and segmental. By leveraging on AFSSB’s 21-year track record in delivering smart parking solutions and back-end enforcement solutions, ITMAX will be able to grow its earnings base on top of the profit guarantee of >RM1.65m per annum for FY24, FY25 and FY26. We believe the integration of ITMAX’s network video surveillance and AFSSB’s artificial intelligence would increase the local council’s efficiency in parking collections. Notably, AFSSB is first local parking company that integrated enforcement system with JPJ system.

Meanwhile, the company and the Johor councils are in progress for potential CCTVs contract, encompassing supply, installation, and maintenance services for 1,600 CCTVs across four municipal councils namely Johor Bahru, Iskandar Puteri, Pasir Gudang and Kulai. In addition to the existing 5,000 CCTVs in DBKL surveillance and 3,600 CCTVs in PDRM surveillance, this should enhance ITMAX’s earnings going forward.

ITMAX’s order book stood at RM607.3m at of 2QFY23. Management intends to grow the video surveillance and analytics business further, which is recurring in nature with higher margin and earning visibility as compared to the supply, installation and maintenance services. As of 1HFY23, its video surveillance and analytics services accounted 68% of its total revenue vs 61% in 1HFY22. By enlarging the recurring income base, ITMAX will be able to pursue growth in other business segments, such as its recent contract win for a hospital in Segamat, which is earnings accretive.

ITMAX is targeting to pay dividend of 20% from its net profit. Based on our estimates, the company is expecting to pay dividend of 1.4sen and 1.7sen per share for FY24 and FY25, translating into yield of 1% and 1.2%. Balance sheet is healthy with net cash of RM138.5m as of 1HFY23.

Source: Rakuten Research - 25 Aug 2023

To sign up for an account : http://bit.ly/40BNqKI

[Youtube Tutorial] Account Opening & Enable Foreign Equity:http://bit.ly/3I5Jzxo