FORMIS RESOURCES HOLD. Reverse takeover of smaller rival - positive for long run. Company report. (Maintained) Rationale for report: Company update

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1 FORMIS RESOURCES (FMSR.KL, FMRB.MK) 10 May 2012 Company report AmResearch Sdn Bhd Reverse takeover of smaller rival - positive for long run Rationale for report: Company update HOLD (Maintained) Price Fair Value 52-week High/Low Key Changes Fair value EPS RM0.88 RM0.83 RM0.92/RM0.71 unchanged unchanged YE to 31 March FY11 FY12F FY13F FY14F Total income (RMmil) Core net profit (RMmil Core EPS (sen) EPS growth (%) 23.9 (10.6) Consensus net profit (sen) n/a n/a n/a n/a DPS (sen) BV/share (RM) PE (x) Div yield (%) P/BV (x) ROE (%) (10.5) Stock and Financial Data Shares Outstanding (million) Market Cap (RMmil) Book value (RM/share) 1.0 P/BV (x) 0.9 ROE (%) (10.5) Major Shareholders Red Zone Development S/B (19.36%) Tan Sri Megat Najmuddin Megat Khas (16.73%) Free Float (%) 29 Avg Daily Value (RMmil) 0.55 Price performance 3mth 6mth 12mth Absolute (%) Relative (%) Investment Highlights We maintain Hold on Formis Resources Bhd (FRB), with an unchanged fair value of RM0.83/share, based on FY12F core EPS of 7.5 sen on a PE of 11x. We have a neutral stance on FRB group s proposed disposal of certain core subsidiaries to Microlink Solutions Bhd (NR) for an indicative amount of RM102mil to be satisfied via the issuance of mil shares in the latter. In what is essentially a reverse takeover, FRB will end up as the controlling shareholder in Microlink, with a 78.44% stake. The Microlink shares will be valued at 22 sen each a premium of 1.9 sen or 9.45% above the five- day VWAMP up to 4 May. FRB would have to undertake an MGO and it intends to maintain Microlink s listing status. Formis and its wholly-owned subsidiary Formis Holdings Bhd on 8 May 2012 entered into Heads of Agreement with Microlink for the proposed disposals of the subsidiaries, pending the signing of the definitive agreements. The interests to be disposed of are:- 1) 100% of Applied Business Systems Sdn Bhd (ABSSB); 2) 100% of Formis Computer Services Sdn Bhd (FCSSB); 3) 51% stake in First Solution Sdn Bhd (FSSB); and 4) 100% of Formis Systems & Technology Sdn Bhd (FSTSB). Apart from FCSSB (which is also involved in systems integration), the other three subsidiaries mainly distribute and resell hardware and software. Collectively, they accounted for about 40% of the FRB group s revenue and about 20% of its core profit after tax in FY11. However, FCSSB s two subsidiaries Formis Automation Sdn Bhd and Formis Network Services Sdn Bhd will not be part of the disposals. No further breakdowns of revenue and earnings are available. Notably, FRB would have to provide a pre-tax profit guarantee for the target companies of RM24mil for the years ending 31 March 2013 and This could imply that our pre-tax profit forecasts for the entire FRB group of RM13mil and RM16mil for FY13F and FY14F, respectively, are conservative. Collectively, the target companies posted pre-tax profits of only RM2.7mil for FY11. PP 12247/06/2012(030106) Notwithstanding our neutral stance, the proposal could be seen as positive for FRB in certain aspects for the long term, subject to effective implementation and cost management:- 1) Assuming control of a much-smaller listed rival in the IT business, particularly in the financial services space; 2) Deriving better size and economies of scale; 3) Wider market reach and clientele base; and 4) penetration into the banking industry, given Microlink s expertise in banking software and solutions.

2 NEUTRAL STANCE MAINTAINED HOLD, fair value at RM0.83/share We maintain Hold on Formis Resources Bhd (FRB), with an unchanged fair value of RM0.83/share, based on FY12F core EPS of 7.5 sen on a PE of 11x. We have a neutral stance on FRB group s proposed disposal of certain core subsidiaries to Microlink for an indicative amount of RM102mil to be satisfied via the issuance of mil shares in the latter. Nonetheless, the group continues to have a strong potential for growth given a strong pipeline of potential jobs. FRB posted a net profit of RM8.2mil (+42% YoY) for the nine-months to 31 December However, this includes a one-off charge of RM4.5mil for a foreseeable loss in a project booked earlier in 2QFY12. We had earlier cut our FY12F net profit to RM9.5mil (- 68% vs. our earlier forecast of RM15.9mil). Our FY13F and FY14F earnings are cut by 22% and 17%, respectively, to factor in a potentially more challenging operating environment ahead. For 3QFY12, FRB posted a net profit of RM0.6mil (+253% QoQ; -63% YoY) on the back of a lower revenue, by -26% QoQ and -15% YoY. 3QFY12 s EBIT margin fell 0.9 of a percentage point (ppt) to 4.4% from 5.3% in the previous quarter, but was up 1.7ppts from 2.7% a year earlier. These numbers signify that FRB remains sound operationally, but are still subject to significant earnings volatility. For the 9MFY12 up till 31 December, FRB had secured new jobs amounting to about RM206mil vs. RM196mil in the previous corresponding period. As at 31 December 2011, its outstanding order book amounted to RM118mil. REVERSE TAKEOVER OF RIVAL An acquisition in as much a disposal FRB will assume control of Microlink Solutions Bhd in what is essentially a reverse takeover exercise. FRB will end up as the controlling shareholder in Microlink, with a 78.44% stake. The Microlink shares will be valued at 22 sen each a premium of 1.9 sen or 9.45% above the five- day VWAMP up to 4 May. FRB would have to undertake an MGO and it intends to maintain Microlink s listing status. FRB had originally invested RM100.77mil in the target companies. FRB and its wholly-owned subsidiary Formis Holdings Bhd on 8 May 2012 entered into Heads of Agreement with Microlink for the proposed disposals of the subsidiaries, pending the signing of the definitive agreements. The interests to be disposed of are:- 1) 100% of Applied Business Systems Sdn Bhd (ABSSB); 2) 100% of Formis Computer Services Sdn Bhd (FCSSB); 3) 51% stake in First Solution Sdn Bhd (FSSB); and 4) 100% of Formis Systems & Technology Sdn Bhd (FSTSB). Apart from FCSSB (which is also involved in systems integration), the other three subsidiaries mainly distribute and resell hardware and software. FCSSB is principally engaged in the provision of computer technology and maintenance of computer hardware and software. FRB says the Microlink group s core strengths lie in the provision of IT solutions to financial institutions, such as those Islamic and conventional banking solutions, while the target companies key competencies are in its proven expertise in providing IT solutions to the insurance industry. As such, the proposed acquisitions will complement the group s application capabilities in the financial services industry space. Additionally, the parties say Microlink s wholly-owned subsidiary CA IT Infrastructure Solutions Sdn Bhd (CAIT) has been appointed by CA Technologies Inc, a leading provider of IT management software and solutions as its country representative partner for Malaysia to distribute licences and services. CAIT will also manage the CA Technologies Inc s partners and customers ecosystem in Malaysia. Coupled with that, the enlarged Microlink group will enhance its products offering end-to-end from hardware, core banking solutions, insurance software to software for management infrastructure. Microlink group posted a profit after tax of RM1.94mil (+3.9% YoY) on the back of a 17% decline in revenue to RM18.7mil. Collectively, they accounted for about 40% of the FRB group s revenue and about 20% of its core profit after tax in FY11. However, FCSSB s two subsidiaries Formis Automation Sdn Bhd and Formis Network Services Sdn Bhd will not be part of the disposals. No further breakdowns of revenue and earnings are available. Notably, FRB would have to provide a pre-tax profit guarantee for the target companies of RM24mil for the years ending 31 March 2013 and This could imply that our pre-tax profit forecasts for the entire FRB group of RM13mil and RM16mil for FY13F and FY14F, respectively, are conservative. Collectively, the target companies posted pre-tax profits of only RM2.7mil for FY11. For the guarantee, in the event the aggregate audited ore-tax profit for FY13 and FY14 is less than the guaranteed sum by an equivalent of 5% (being RM1.2 mil or more, FRB shall be liable to pay to Microlink the amount in excess of the shortfall. AmResearch Sdn Bhd 2

3 The guarantee will solely be in respect of the pre-tax profit attributable to the 51% equity interest currently held by FHB in FSSB and does not extend to that attributable to the remaining 49% equity interest held by a third party in FSSB. The management of the target companies will be integrated with those of Microlink, which will undertake a post-completion integration and strategic business planning exercise to be spearheaded by FRB s executive committee. FRB will seek a personal undertaking from Microlink s existing CEO Peter Yong Kar Seng that he would enter into a contract of employment to act as the CEO of the enlarged Microlink group for a period of at least three years following the completion of the proposed acquisitions. INSAS COMMON SHAREHOLDER Insas an 8.12% (15.1mil shares) shareholder of FRB is also a substantial shareholder of Microlink, with a 5.48% stake (6.96mil shares). Insas emerged as a shareholder in FRB in July 2011, and much earlier in Microlink in July Insas is a profitable diversified group with activities in stock broking (M&A Securities S/B), project and credit financing (Insas Credit & Leasing S/B), property investment, technology (ACE-listed Inari Technology Bhd), car rental, high fashion (Melium Group) and F&B (DOME Café). Soon after Insas emergence as substantial shareholder in FRB, Accenture s former managing partner for Asia, Datuk Larry Gan was appointed as an independent director in the company. POSITIVE FOR THE LONG RUN Notwithstanding our neutral stance, the proposal could be seen as positive for FRB in certain aspects in the long term subject to effective implementation and cost management:- 1) Assuming control of a much smaller listed rival in the IT business, particularly in the financial services space; 2) Deriving better size and economies of scale; 3) Wider market reach and clientele base; and 4) penetration into the banking industry, given Microlink s expertise in banking software and solutions. We maintain HOLD on FRB. AmResearch Sdn Bhd 3

4 TABLE 2: FINANCIAL DATA Income Statement (RM mil, YE 31 March) FY10 FY11 FY12F FY13F FY14F Revenue EBITDA Depreciation (1.8) (2.3) (2.8) (2.9) (2.9) Operating income (EBIT) Other income & associates (1.2) (1.0) (1.0) Net interest (4.9) (3.7) (4.4) (4.3) (3.9) Exceptional items 0.0 (35.2) (4.5) Pretax profit 16.2 (21.7) Taxation (2.5) (5.1) (6.2) (3.2) (4.0) Minorities/pref dividends 1.1 (7.2) (9.1) (5.0) (5.0) Net profit 12.6 (19.6) Core net profit Balance Sheet (RMmil, YE 31 March) FY10 FY11 FY12F FY13F FY14F Fixed assets Intangible assets Other long-term assets Total non-current assets Cash & equivalent Stock Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interest BV/share (RM) Cash Flow (RMmil, YE 31 March) FY10 FY11 FY12F FY13F FY14F Pretax profit 16.2 (21.7) Depreciation Net change in working capital (2.1) Others (11.7) (0.2) 2.3 Cash flow from operation (2.0) Capital expenditure (0.8) (1.7) (1.6) (2.0) (2.0) Net investments & sale of fixed assets Others Cash flow from investing 0.3 (1.1) (1.6) (2.0) (2.0) Debt raised/(repaid) (13.6) (25.6) (4.0) (4.0) (4.0) Equity raised/(repaid) Dividends paid 0.0 (13.9) Others (5.4) 9.2 (6.0) (6.0) (6.0) Cash flow from financing (19.0) (30.4) (10.0) (10.0) (10.0) Net cash flow 1.9 (16.5) (13.6) Net cash/(debt) b/f (35.4) (19.8) (22.3) (24.1) (17.6) Net cash/(debt) c/f (19.8) (22.3) (24.1) (17.6) (5.3) Key Ratios (YE 31 March) FY10 FY11 FY12F FY13F FY14F Revenue growth (%) (15.3) (3.1) (8.5) EBITDA growth (%) 0.3 (14.5) (1.0) Pretax margins (%) 5.0 (7.0) Net profit margins (%) 3.9 (6.3) Interest cover (x) Effective tax rate (%) 15.3 (23.6) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, AmResearch estimates AmResearch Sdn Bhd 4

5 Published by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15t h F l oor B a ng un an A m B a nk Gr ou p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03) ( re sear c h) F a x: ( 03) Printed by AmResearch Sdn Bhd ( P) (A member of the AmInvestment Bank Group) 15t h F l oor B a ng un an A m B a nk Gr ou p 55 Jalan Raja Chulan Kuala Lumpur Tel: ( 03) ( re sear c h) F a x: ( 03) The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice. For AmResearch Sdn Bhd Benny Chew Managing Director AmResearch Sdn Bhd 5

GENT PLANTATIONS BUY. From an implied MV/ha perspective. Company report. (Maintained) Rationale for report: Company Update PLANTATION

GENT PLANTATIONS BUY. From an implied MV/ha perspective. Company report. (Maintained) Rationale for report: Company Update PLANTATION PLANTATION GENT PLANTATIONS (GENP MK) 15 March 2013 Company report Gan Huey Ling, CFA gan-huey-ling@ambankgroup.com 03 2036 2305 From an implied MV/ha perspective Rationale for report: Company Update BUY