PETALING JAYA: Sedania Innovator Bhd’s (SIB) recent proposed acquisition of Sedania As Salam Capital (SASC) for RM12mil is a leap into the fintech sector as the company believes in its potential growth in the Islamic banking space.
The technology company’s rational for the acquisition seems rather clear: SASC provides the As-Sidq system and is currently utilised by 21 financial services companies in Malaysia.
While founder and managing director Datuk Azrin Mohd Noor believed the proposed acquisition will obtain shareholders’ approval, he said valuation wise, SASC should be worth much more than the 8 times forward price-to-earnings (PE) since it is already profitable and offer high margins.
“But given the potential complications that might derail the deal, it was agreed that the deal be sealed at 8 times,” he explained.
Since its inception in 2010, SASC has been providing the As-Sidq, which is a Tawarruq commodity trading system that utilises prepaid telecommunication airtime credit as the traded commodity based on syariah principles.
The system also complies with the international standards set by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). Based in Bahrain, AAOIFI consists of about 45 country members.
With As-Sidq, Azrin said buying and selling of commodities using Tawarruq Islamic-based finance disbursement allowed customers to receive their money in less than 24 hours.
“The solution automates buying and selling of mobile prepaid airtime as the commodity used in the transactions between the customer, the bank, the commodity supplier and the buyer.
“In this case, the customer is purchasing the commodity as the underlying asset from the bank. The commodity or asset is then sold for cash to a party other than the original seller,” he said.
The system has processed about RM25bil worth of personal financing transactions under Islamic banking to date. Islamic banking’s personal finance is projected to have a market size of RM31.9bil in 2020.
On Feb 27, SIB inked a share sale agreement with Sedania Corp Sdn Bhd (SedaniaCorp) to buy SASC for RM12mil.
The purchase consideration will be satisfied via RM4mil cash and RM8mil via the issuance of 25.8 million new ordinary SIB shares at an issue price of 31 sen per share.
According to SIB’s filings, the issue price of 31 sen per share represents a premium of RM0.0138 or 4.66% after taking into consideration of the five-day volume weighted average market price of SIB shares up to Feb 24 close of RM0.2962, being the last market day before the share sale agreement.
The RM4mil cash payment would be staggered over three tranches, namely RM1mil in the first tranche and RM1.5mil in the subsequent two tranches upon fulfilment of profit guarantee.
SASC will provide a profit guarantee of RM1.5mil per year for the financial years ending December 31, 2017 (FY17) and FY18.
The deal was sealed at 8 times forward price-to-earnings (PE) to enable SIB derive the best benefits from its future growth.
SASC is owned by SedaniaCorp, where Azrin holds a majority stake of 99.99%, making this a related party transaction. The remaining shares are owned by Azrin’s spouse Datin Noraida Saludin.
“The As-Sidq system is already present in 21 financial institutions and access to 500 cooperatives in the country.
“SASC’s acquisition will not only boost customers’ confidence in its product offering but it will also create value for our shareholders,” said the 47-year-old law graduate.
SASC posted a net profit of RM1.1mil and revenue of RM3.3mil in FY16, from a net profit of RM800,00 and revenue of RM2.2mil a year ago.
This was due to higher transaction volume as more personal financing applications were approved by financial services companies, as well as the offering of a new product in fixed deposit in the year.
“It will be a significant contributor to our financials, which more than offset the dilution effect from the increase in share base,” he noted.
He added that the proposed acquisition is expected to increase SIB’s share capital from RM20mil in FY15 to RM28mil in FY17.
Azrin believed the acquisition would be worthwhile, since there are other untapped segments that SIB could penetrate via the As-Sidq system such as hire purchase, mortgage, credit card and deposits.
Mortgage offers the highest utilisation rate of RM240.1bil by 2020 followed by hire purchase at RM87.2bil.
“The potential is huge in the Islamic banking space due to the growing awareness of syariah-compliant products among Muslims as well as those seeking personal financing aligned with their core principles and objectives,” he said.
An independent market research report by Infobusiness Research and Consulting Sdn Bhd showed that the Islamic banking segment posted compounded annual growth rate of 3% from RM25.6bil to RM28.8bil between 2012 and 2016.