Friday 29 Mar 2024
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BANKING software solutions provider Microlink Solutions Bhd is starting to reap the fruits of its business consolidation exercise over the past year. Driven by major shareholder Omesti Bhd (formerly known as Formis Resources Bhd), Microlink has a multi-decade track record in executing banking software projects as well as access to new technological advancements, which it aims to monetise.

Investors have certainly taken notice of the stock, which has gained 183% this year and closed at RM1.70 last Friday, thanks to a strong earnings performance in its latest quarterly disclosure.

Group CEO Peter Yong tells The Edge that the market may have started to recognise the potential of Microlink (fundamental: 2.10; valuation: 0.20). It has successfully established long-standing relationships with major clients such as RHB Bank and Bank Rakyat, which count on the firm to provide an integrated digital infrastructure for Islamic banking.

Peter-Yong_microlink_mm1073_theedgemarkets“Our business is organised into four pillars: trading and distribution, financial services, systems integration, and a division that represents our US partner CA Technologies Inc for the provision of technical tools to data centres,” Yong says.

Founded in 1996, Microlink began its operation in earnest after winning a contract to develop a specialised software solutions package for Islamic banking. “This gave us a niche that no one else had back then as at the time, the concept of Islamic banking was still very new,” says Yong.

It is worth noting that the contribution of new segments — trading and distribution, and systems integration — is modest for now. Microlink’s income is still primarily derived from its banking solutions business, and Yong says the company has identified new avenues of growth over the past two years.

The main challenge for the company is that the Malaysian banking sector is nearly fully saturated, with almost all major financial institutions having long-term contracts with software operators.

Yong says Microlink’s main competitor in the segment is Singapore-listed Silverlake Axis Ltd, which is another player in the Islamic banking solutions segment.

“Because of this, we plan to extend our reach overseas. Indonesia is far behind in terms of developing its Islamic finance industry, and it is a huge market. But even within Malaysia, there are still segments with potential, such as the cooperatives.”

Yong sees this segment as a perfect fit for Microlink, given that it already has relationships with two leading cooperative banks that are key customers. Without divulging the specifics, he says the company is working towards securing agreements with some of the country’s leading cooperatives.

Malaysia has one of the largest numbers of cooperatives globally, with millions of members and billions of ringgit in cumulative deposits, he explains.

“They have grown to a size where they have become like small banks in their own right. We see a trend among the cooperatives, where they are seeking specialised banking solutions and an updated back-office system.”

Microlink’s latest quarterly earnings is reflective of its strong earnings growth potential. It reported a net profit of RM9.05 million for the quarter ended March 31, a six-fold increase from RM1.4 million in the previous corresponding period. Revenue amounted to RM61.94 million, also a big increase from RM10.29 million the year before.

Yong says two-thirds of the company’s revenue will still come from the financial services and software divisions. The rest will come from the trading and distribution side, which offers significant top-line contribution but much lower margins.

Additionally, Microlink sees its close relationship with Omesti as an added advantage. The group invested in Microlink in 2013 and still holds a stake of 80%. The company subsequently initiated a corporate exercise to acquire five subsidiaries under Omesti for RM50 million, which have been successfully injected into Microlink.

“We began as a software company with one major focus, which was in banking solutions. Today, with the presence of Omesti and the restructuring, we have diversified our presence into different segments to boost our potential,” says Yong.

One division in Microlink provides support to a franchise concession owned by Omesti for eCOURTS, an online management system for the Federal Court of Malaysia.

“We have a team within Microlink working on this. It is Omesti’s project, but we are paid a fee for the outsourced technical support,” he explains.

Through the Omesti Innovation Lab, which is a think tank of technological experts, both companies seek to discover new breakthroughs as well as ways to monetise their vast portfolio of intellectual property.

Moving forward, Yong says Microlink’s investors have good reasons to be excited about the company’s prospects in the coming years.

“All the businesses generate good cash flow, as evidenced by our strong balance sheet. In our pipeline, there are some significant deals that should happen over the next 12 months, which could translate into substantial income.”

Yong adds that Microlink has met the requirements for a transfer to the Main Market, which could open new possibilities for the company. “It makes the shares more investable and could result in greater trading activity. As for a potential dividend, that would be down to the major shareholder (Omesti),” he says.


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on June 29 - July 5, 2015.

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