News Article -- May 14, 2007
CSA up on privatisation talk
(source: The Edge)by Ng Kar Yean
Computer Systems Advisers (M) Bhd (CSAM) has been touted as a privatisation candidate over the past two years, but few investors bought the story then.
Now, however, the stock is drawing interest. The recent spate of large companies being taken off the local bourse has made privatisation the buzzword among investors.
CSAM's share price has been climbing as a result; it closed at RM2.52 on April 25, and rose 37 sen to close at RM2.89 two days later. Over 1.9 million shares crossed on April 27, from only 32,000 traded two days earlier. The local bourse was closed on April 26. CSAM's share price further increased to close at its year's high of RM3.28 last Thursday.
"Privatisation is in vogue now. So investors are zooming in on companies with the right ingredients for such as exercise, which CSAM has," says a fund manager. The market has moved eventhough there is no news from CSAM's parent company CSA Holdings Ltd that it is implementing such a plan. CSA Holdings owns 50% of CSAM.
The possibility of CSAM being taken private was first floated in 2005 when CSA Holdings was privatised by US parent company Computer Sciences Corp (CSC). CSA Holdings was delisted from the Singapore Stock Exchange in October 2005.
"(Research house) Hwang-DBS Vickers has been making the call since the Singapore parent company was privatised," says the fund manager.
Hwang-DBS Vickers believes CSC will consider privatising CSAM next. Bolstering its belief is the fact that CSAM is the group's regional hub, so CSC wants full control over it.
"An unlisted entity allows management to concentrate its time and resources on business issues, which will otherwise have to be spent on complying with the regulatory requirements as a listed company," adds the research house.
More importantly, the notion of being a public listed company to gain customers' confidence may not apply to CSAM.
Hwang-DBS notes that in one major outsourcing contract, the agreement was signed between CSC Malaysia, a subsidiary of the US parent company, and the client.
"The reason was the customer needed assurance that the outsourcing services would continue if CSAM cannot provide the support. Thus, the listed status of CSAM is not crucial to winning new contracts," says the research house. It is likely the contract referred to is the RM1.3 billion job from Malayan Banking Berhad that was secured in 2003 to manage the banking group's computer systems for 10 years.
What's the takeover price?
Hwang-DBS uses several methods to value CSAM, including using the price that CSA Holding was taken private. At S$2.05 (about RM4.60) per share, CSA Holdings was valued at 22 times its earnings per share (EPS) of nine cents in 2005.
Based on this valuation and CSAM's EPS of 13 sen for the financial year (FY) ended March 31, 2005, the research house says the take-private price could be RM3.01. The company's share price was about RM1.60 when the call was made in October 2005.
In FY2006, CSAM's EPS increased to 20.2 sen, and TA Securities expects the figure to increase to 25 sen in FY2007. Based on the implied valuation of CSA Holdings and CSAM's EPS in FY2007, the takeover price of CSAM could rise to RM5.50 per share.
This price may be too optimistic. Nevertheless, it is an indication the market has not factored such a possibility into CSAM's share price. There are about 101.24 million CSAM shares issued. CSA Holdings owns 50.62 million CSAM shares, or half the issued capital.
Having said that, CSAM's shares could have just been rising towards their fair value in recent weeks, and not because of speculation that the company would be taken private.
Just two weeks ago, CSAM's share price was about RM2.50. At this price, the stock is trading at 10 times its forecast EPS in FY2007, and 8.3 times its EPS in FY2008. The stock is trading at the lower range of its price-to-earnings multiples band in the past six years. The stock was trading at PE multiples of over 20 times three years ago.
Business-wise, the company is working on securing more IT outsourcing jobs. In a report by TA Securities last month, it said CSAM was close to securing a RM50 million contract, which would last five years. More exciting is the bid for a RM500 million contract from a telecommunications company. If secured, it is expected to boost CSAM's revenue from April 2008 onwards.
Renewed expectations that CSAM will be privatised and possible new multi-million contracts are likely to keep CSAM on the radar screen of investors in the coming months.