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IFCA MSC - Huge growth awaits


The FBMSCAP has taken a badly hit, down 18.5% from its peak on Thursday. Is this the time for bottom fishing? Certainly yes, if you have a lot of cash, as I see this as a correction, not a crash, and the worst is that KLCI might fall to 1700 points for the next 1-2weeks. If that did not happen, we will be seeing another rally and KLCI might be possibly hitting 1900 on December 2014. 

All the counters I recommended has been underwater except Sentoria. Why? My thoughts are because Sentoria is more a institutional stock rather than a retailer ones. You can see that Seacera, SMRT, Taliworks are badly hit because most of them have not been under the institutional radar yet. Thus, I prefer to be more conservative now and would start to look into some possible institutional darlings for the next 3-6 months. Remember, like the rest, this stock could only outperform if the market sentiment turns better. 

I know Maybank and CIMB has a report on IFCA already, but I have to assure you, this is not another Perisai/ Cuscapi, but it is a hidden gem in the making and I have highlighted a lot of times my intention to write a report to it. By looking at all GST counters, only IFCA and YGL manage to hold above 50MA, but to choose between them, IFCA is the solid fundamental-based company, not just based on GST play. Therefore, I am sorry to say that IFCA is a better way than Goodway.

TP: RM0.80
Current price: RM0.44
Market cap: RM201m
Upside: 82%
(A) Company Background
-IFCA was founded by the Yong brothers. They have 21 offices in 7 countries, namely;
(i) Malaysia; (ii) China; (iii) Indonesia; (iv) Singapore; (v) Philippines; (vi) Vietnam; and (vii) South Africa. Recently, they also announced they will be moving in Japan market and soon, the Thailand market.

-IFCA is an enterprise software solutions provider that targets mostly property developers/hotels/clubs. They used to offer window-based software to their clients where each software would roughly cost RM150k per client, and it of course depends on the client size as well, if the client is SPSETIA, probably that would cost them up to million of RM.

-2 years ago, IFCA has started to provide upgrades for their clients from Windows-based to cloud-based software, where each upgrade could cost more than RM500k. Currently, less than a hundred or not more than 5% are cloud-based users.

-IFCA has 1500 clients where 1050 of them are Malaysia-based. Any listed property developer, you name it, 90% chances of them are IFCA’s client, eg. SPSETIA, ECOWORLD, IJM, SIME DARBY, MAH SING, TROPICANA, IOI, etc.Some other major clients that IFCA has are as follows:



(i) Cloud-based software upgrade

-What is a cloud-based software? Most of the larger developers have moved to cloud-based software, eg. ECOWORLD. If you have attended their showroom before, their sales representative will have an ipad showing you all the latest projects/designs/prices/layouts all those stuff that windows-based software could not offer.

-What is so great about this software then? As the world is evolving into faster and more efficient way of working environment, those senior managers are able to track their sales through their mobile apps or other stuff like event management/budgeting etc through the software. Although not more than 5% of IFCA’s clients have adopted this software, we could be assure that more and more companies will eventually subscribe to this in the future, and the growth will be fantastic as technology advances. According to CIMB, per upgrade would generate more than RM500k to IFCA. Just 50 additional clients that opt for this software will alone contribute more than RM25m worth of revenue to IFCA, and this number is going to grow by leaps and bounds in the future.

(ii) GST financial accounting solution provider

-They own the products’ Intelligent Property (IP) for all of their software. Of course, they provide GST upgrades for all their clients that has already been using their software, and these clients are sticky.

-The clients have no choice, but to upgrade their financial accounting software into a GST compliant one. Each upgrade will cost more than RM20k to RM300k (dependant on the size of the company). Unlike MYOB accounting software, which Censof has partnered with, only requires RM1000 per software because they only targets micro enterprise (ie, companies that only contributes less than RM500k revenue). The good thing about IFCA is their clients will have to opt for annual maintenance as well, generating 18-20% recurring income of their initial cost of the software, while for Censof/MYOB, due to their customers being the smaller retailers and micro enterprise, will you pay maintenance of 18-20% a year to them for this service? Probably not.

- How many more clients then IFCA has in Malaysia that has not upgraded to GST compliant? According to report by the edge, 90% have not upgraded. That will be close to 900 clients.

- How much revenue that IFCA could generate from here? From the range provided above, we take a median of RM100k per software x 900 clients = RM90million worth of untapped revenues!

(iii) China/Japan markets

-IFCA had ventured into China 9 years ago, and last 2 years, they have been expanding aggressively by opening more offices in China, and client base has increased to more than 100 out of the market size of 45,000 property developers in China. While Japan market, I expect IFCA to expand faster by using the dealership model, and they will get a certain fee based on the sales that its dealers sell, therefore, any revenue from here is consider pure profit to IFCA.

-They would open up more offices and might double their offices to 18 offices in FY2015. You will see at least 40-50% growth in revenue in China for the next 2 years. The big breakthrough actually happened on FY2012 when they successfully secured Wanda as their client. Therefore, securing other smaller property developers will have lower barrier for IFCA!

-Of course, if revenue doubles, PAT would more than double, as software business do practice economies of scale, therefore increasing margins will improve their PAT by leaps and bounds.

(B) Shareholders


Yong brothers (Ken Yong and Yong Kian Keong) – 46.5%
DP Capital – 5.58%
Brahmal Vasudevan ~3% (sold down 2%)
Minority shareholders – 45%

Recently, IFCA’s chairman, Yong Kok Leong (do not be mistaken as one of the Yong brothers as it is highlighted in the annual report, he is not related to the Yong brothers) has resigned from his chairman post and has become the Head of Operation in Malaysia. What does this tells you? IFCA might have too much business, even Mr Yong have to personally resigned from his Independent Director post to go into the ground to manage the Malaysia’s operation, and maybe his partners are too busy expanding their business in oversea!

(C) Financial analysis


Actually CIMB has covered up most of the important points about IFCA, but it did not really explains how they arrived with the numbers in FY2015.


Revenue




The GST implementation will increase IFCA’s revenue by potentially RM80m for the next 1 year (~RM100k x 900 clients), boosted by China’s forecasted revenue at RM40m (1H 2014 already generated RM21m), with other markets and cloud based upgrades contributing another RM20m, a 18% of recurring income of these revenue will be RM24m, therefore, IFCA’s total revenue for the next 1 year could be easily RM164m.

PAT

Remember IFCA is a MSC status company, which will be expiring in FY2016, if I am not mistaken. Therefore, they will be entitled to full exemption for tax incurred for Malaysia operation, and while in China, they are still enjoying the 50% discount on tax imposed by the government for the next 3 years. IFCA's largest expense is its staff cost and employee benefits. In order to be profitable, they have to hit a certain mark to increase their margins.

If we take a revenue of RM164m multiply by 15% PAT margin, you will easily get RM24.6m for the next 1 year’s profit, and I am only talking about 15% margin, by right, with more offices and economies of scale, the margin should expand beyond Q2 2014’s PAT margin at 16.6%. A merely 20% PAT margin will generate a whopping of RM33m worth of PAT! 

Cash levels

IFCA has no debt totally, only increasing cash levels, and I expect cash to surge to RM45m by next year due to high cash flow from operation and lower capex, as most of the capex has been spent to develop the GST software previously. A potential dividend will be announced soon.


(D) Valuation


Based on CIMB’s forecast, they are using P/E of 21x for FY2016 to derive a price target of RM0.78. I would not be so aggressive to target FY2016 as FY2015 will be sufficient for now. CIMB has forecasted an earnings of RM15m for FY2015, and for me, IFCA might be able to hit number even this year!

Therefore, with an earnings of RM25m for next 1 year, it is unfair to use a P/E to multiply by its earnings because the earnings include GST implementation which is one-off and beyond the one-off, you have 18% maintenance income which might be bundled with the original software.

My valuation will be based on only 18x forward P/E of earnings ex-GST income and plus the net income to be received from GST and a cash of RM45m.

 (E) Technical analysis



IFCA has attempted to break the RM0.52 resistance for 3 days consecutively, but the market sentiment for small cap is too bearish, causing the stock to collapse back to previous support at RM0.375, however, it quickly rebounded to RM0.44 and it might test the RM0.52 again soon (only if market sentiment reverse), which I do not see this happening soon.

If market is bullish again. IFCA will break RM0.52 and next stop could possibly be RM0.60 and beyond.
S1: RM0.375, S2: RM0.33
R1: RM0.52, R2: RM0.57, R3: RM0.61


(F) Risk reward ratio
(i) Upside return of 82% - Using its Sum-of-Parts valuation, IFCA should be valued at RM0.80.
(ii) Downside risk of 18% - Watchout for support at RM0.375, if market drops again, it will fall to RM0.33, at this trading environment, be cautious


R/R ratio: 4.5 times. Try to buy as close to RM0.375 if there is opportunity.

 
(G) Rerating factors/ Catalysts
(i) The greatest GST implementation beneficiary with superb growth story
(ii) More ventures into other markets, Thailand/ Korea etc
(iii) Higher earnings forecast than the streets (and I am fairly certain it will and CIMB might increase their TP again?)
(iv) Main market listing by 2016
(v) Bonus issue/ potential dividends
(vi) Potential venturing into e-commerce/ other scalable business based on its property/ clubs clients’ base
(vii) Even the chairman resigned and become head of operation in Malaysia, and you should know how busy they are!

Cheers. If you name my top picks and play, I would rank as follows: (i) IFCA; (ii) SMRT and (iii) EPMB/Taliworks, and I strongly believe IFCA could hit my TP if the market did not crash. Watch out, and do not buy when the price is close to resistance, practice buy on weakness, etc. I am hoping the market sentiment reverse asap.

http://klgemseeker.blogspot.com/2014/10/ifca-msc-huge-growth-awaits.html
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