Warrants Update: IFCAMSC-WA a GST play

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THE shares of business software solutions provider IFCA MSC Bhd have seen a spectacular rise, since word got out that the group is a sure beneficiary of the implementation of the Goods and Services Tax (GST) by the property sector.

The buyers include investor Brahmal Vasudevan, founder and CEO of private equity firm Creador, who emerged as a substantial shareholder in IFCA with a 5.55% stake on Aug 26.

Just ahead of the Aug 27 filing with Bursa Malaysia, IFCA saw some 139 million shares or 30.88% of its share base change hands on Aug 25. Little wonder then that Bursa issued an unusual market activity query on Aug 26 (Tuesday).

At its 44.5 sen close on Aug 27 (Wednesday), IFCA’s share price has more-than-tripled in less than two months, from 12.5 sen on June 30. Over the same period, its warrant, IFCAMSC-WA, jumped 446.2% from 6.5 sen on June 30 to 35.5 sen on Aug 27.

While investors may rightly wonder just how much upside is left after such a strong rally, the 420% year-on-year jump in the company’s second-quarter earnings to RM3 million, against a 42% rise in revenue to RM18.25 million, does justify a higher valuation.

Its 2Q profit alone exceeds the RM1.7 million IFCA made in the whole of FY2013. In fact, CIMB Research reckons that IFCA could be worth 53 sen apiece, assuming the company makes a RM15 million profit in FY2015 or 21 times the research house’s forecast of a fully-diluted earnings per share of 2.5 sen (based on a 33.3% increase in the share base to 600 million).

“Likely re-rating catalysts for the stock include higher GST-driven and China sales, and potential dividend or bonus issues,” CIMB Research says in an unrated Aug 27 note.

In an unrated Aug 25 note, Maybank IB Research says IFCA could be worth 42 sen apiece, based on 14.5 times FY2015 earnings of 2.9 sen per share or RM13.1 million. It expects net profit to grow 50% to RM8.8 million in FY2014, pointing out that only 10% of IFCA’s clients had upgraded their IT software for GST implementation.

Moreover, IFCA had net cash of RM30 million or 6.7 sen per share, as at June 30. Pointing to its dealings with Chinese property developer Dalian Wanda, Maybank IB expects the company’s China operations to record double-digit growth and overtake the Malaysian business by FY2016/17.

If the analysts are right, IFCA’s warrants might be worth another look. IFCAMSC-WA has a 10 sen exercise price, one-for-one conversion ratio and expires in February 2016. At its close of 35.5 sen on Aug 27, the warrant was at a 2.24% premium to the mother share, and offered an effective gearing of 1.32 times to the underlying security.

In theory, if IFCA gains 19% to reach CIMB’s valuation of 53 sen, IFCAMSC-WA should be worth 21.1% more at 43 sen, if one assumes zero premium to the underlying share.

This story first appeared in The Edge weekly edition of Sept 01-07, 2014.