This article first appeared in The Edge Malaysia Weekly on March 6, 2023 - March 12, 2023

THE demerger of SMRT Holdings Bhd from its education arm Minda Global Bhd brings the former back to square one, making it a pure technology play.

In 2017, the group expanded from being a human resources software company to one with interests in major bricks-and-mortar educational institutions, when it took a controlling stake in Masterskill Education Group Bhd (MEGB), now known as Minda Global.

At that time, SMRT said that the acquisition was a good fit for the group, as it was also in the education sector. Apart from its HR software and training business, SMRT owned Cyberjaya University College of Medical Science then.

However, Minda Global has always been seen as a drag on SMRT as the former had been loss-making for some time although, operationally, it has been profitable since the financial year ended Dec 31, 2019 (FY2019). In FY2021, it reported a net profit of RM3.7 million and continued its turnaround with a net profit of RM6.5 million in FY2022, as reported in its latest financials released last week.

The group is now decoupling from its education business and consolidating its technology solutions business as it aims to leverage the latter for future growth.

“SMRT is learning from the experience of the past, when it doubled down on the education business through MEGB. Now, with a more focused structure, investors have started to pay attention to the group,” says an investor in SMRT.

Year to date, SMRT’s share price has increased by more than 183% to 45.5 sen apiece as at last Thursday, valuing the group at some RM202.6 million. The counter really took off starting Feb 15, about a week after the deal was announced.

On Feb 7, SMRT said it was proposing to acquire the remaining 36% stake in N’osairis Technology Solutions Sdn Bhd (NTS) it did not own, for a purchase consideration of RM72 million. It also proposed to dispose of its 100% stake in SMR Education Sdn Bhd (SMRE) for RM49.5 million to Special Flagship Holdings Sdn Bhd (SFH) — the private vehicle of SMRT’s largest shareholder, Tan Sri Dr Palaniappan Ramanathan Chettiar, with total direct and indirect interest (via SFH) of 29.64%.

SMRE holds 42.08% of Minda Global.

Some view the acquisition of NTS positively because SMRT would have 100% control of the Internet of Things (IoT) solutions provider, which has been making good profits so far.

“The potential of SMRT used to be diluted because of its exposure to the education business, which requires a lot of capital and operational expenses. It has a different cost and return profile than the technology solutions business,” the investor adds.

However, as pointed out by this newspaper on Feb 13, SMRT already owns a majority 64% of NTS and consolidates its results in its books.

It is also worth noting that the vendor of the 36% in NTS, Permata Kirana Sdn Bhd, had acquired the stake in October 2020 for only RM6 million. This would mean that NTS’ value has risen from about RM17 million to RM200 million within a short period of two-plus years.

Nevertheless, NTS has seen its earnings rise over the years, reporting net profits of RM9.14 million, RM14.02 and RM20.1 million in the financial years ended Dec 31, 2019 (FY2019), FY2020 and FY2021 respectively.

NTS provides managed IoT solutions to enterprises. According to its website, its clients include Tenaga Nasional Bhd, the Mydin chain of stores, Pan Malaysia Pools Sdn Bhd and Indonesia’s Perusahaan Listrik Nasional as well as some of Australia’s Commonwealth Bank’s branches in that country.

The company recorded RM20.11 million in net profit in the financial year ended Dec 31, 2021, from RM51.1 million in revenue, for a profit after tax (PAT) margin of 39.43%, according to SMRT’s circular to shareholders for the proposed acquisition of the 36% stake in NTS.

And the PAT margin has been growing from 21.77% in the financial year 2019.

The proposals are considered related-party transactions as Palaniappan’s sons are indirect shareholders of NTS.

Maha Ramanathan Palan, who is also the group managing director of SMRT, and his brother Malayandi Subu Palan, are shareholders of Citra Ilham Sdn Bhd, which in turns hold the 36% stake in NTS through Permata Kirana.

The proposed acquisition does not come with a profit guarantee.

The deal values NTS at RM200 million on a price-earnings (PE) multiple of 9.95 times, based on its audited FY2021 net profit of RM20.11 million.

If NTS is valued at RM200 million, it means SMRT’s share price should be at least 45 sen per share. This means that the counter is almost fully valued at the time of writing, based just on the value of NTS. (SMRT has two business segments — education and technology.)

However, if one were to take the historical PE multiple of Kronologi Asia Bhd of 17 times, this would mean that NTS could be worth RM340 million, translating into a valuation of around 75 sen per share for SMRT.

But note that Kronologi Asia has a bigger regional presence than NTS. While both have a presence in Malaysia and Indonesia, Kronologi Asia is also in Singapore, Thailand, the Philippines, India, Taiwan, Hong Kong and China.

In fact, Kronologi Asia’s revenue derived from Malaysia and Indonesia is small, with Singapore, the Philippines and China being its major markets. In the nine months ended Oct 31, 2022, revenue from Singapore, the Philippines and China made up 87% of Kronologi Asia’s total revenue.

However, this does not mean that NTS would not be able to expand to more markets in the region later on.

If the deal goes through, SMRT will be closing a chapter in its books and writing a new one by focusing only on the IoT managed services business through NTS.

The proposals require SMRT shareholders’ approval.

Meanwhile, if the disposal of SMRE’s stake to Palaniappan’s private vehicle SFH goes through, a mandatory takeover will be triggered at Minda Global, leading to a potential privatisation of the education group.

Minda Global shares have risen by 13% to last Thursday’s closing price of 8.5 sen, valuing it at RM142.7 million.

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