Ancom springs a surprise

The corporate exercise follows a group-wide restructuring being undertaken by ALB’s parent Ancom Bhd, where the former’s logistics and warehousing business will be hived off to Nylex (Malaysia) Bhd. Nylex is a 50.25%-held subsidiary of Ancom, which also owns 45.06% of Ancom Logistics.

Ancom Logistics Bhd (ALB), a company that has always played second fiddle among three listed entities under businessman Datuk Siew Ka Wei, shot to attention this week on the back of a corporate exercise involving S5 Holdings Inc.

On the face of it, S5 may sound like a secret service agency, similar to MI5 of the UK. S5 may not be in the business of international espionage, but it does bear one similar trait -- it is in the business of security.

Through subsidiary S5 Systems Sdn Bhd, its core business is the provision of security technology.

It is no stranger to the national security and biometric system, being the proprietor of the National Foreigner Enforcement and Registration System that was implemented in 2011. S5 is not a new name to the Malaysian corporate scene. It is said to be well-connected and has influential shareholders. Which is why MyEG Capital Sdn Bhd was prepared to pay a hefty RM90mil for a 10% stake in the company, a deal which was announced last month.

S5 is tipped to be a frontrunner for the RM1.5bil National Integrated Immigration System (NIIS) project. This week stock exchange filings showed that it is seeking a back-door listing through Ancom Logistics Bhd (ALB).

The corporate exercise came as a surprise to many as S5 is said to have some influential shareholders.

On Thursday, ACE Market-listed ALB said it is acquiring S5 from its existing shareholders, namely S7 Holdings Sdn Bhd, Merrington Assets Ltd, MY EG Capital Sdn Bhd and Avocat Sdn Bhd.

The price is to be determined later after an independent valuation is done on S5. ALB will issue new shares to the vendors as payment, the company said.

For this, ALB has entered into heads of agreement with the four shareholders of S5. If all goes according to plan, the vendors will launch a mandatory general offer for the shares not owned in ALB upon fulfilling all conditions for S5 Holdings to be listed via the exercise. It then will undertake a private placement of new shares - a move to address its public shareholding spread to meet listing requirements.

The corporate exercise follows a group-wide restructuring being undertaken by ALB’s parent Ancom Bhd, where the former’s logistics and warehousing business will be hived off to Nylex (Malaysia) Bhd. Nylex is a 50.25%-held subsidiary of Ancom, which also owns 45.06% of Ancom Logistics.

Siew, in turn, has a direct 11.95% stake in Ancom, with a another 9.82% held indirectly.

Observers note that due to his political connections, Siew was appointed the chairman of Tourism Malaysia in 2016.

However, following the change in government in 2018, Siew was investigated in early 2019 over an alleged abuse of power involving a government contract that was awarded just before the 14th General Election.

Interestingly, it was only five weeks ago that MyEG said it was buying a 10% stake in S5 from Merrington for RM90mil.

It said S5’ solutions and systems were “complementary” to the company’s existing and prospective service offerings, especially within the immigration space in Malaysia.

The view in the market was that MyEG, which is co-founded by Wong Thean Soon or TS Wong, would further raise its stake in S5.

MyEG, which is now injecting its 10% block into ALB, said the proposed RTO is an avenue for it to unlock its initial investment.

The MyEG acquisition of the 10% stake in S5 last month had valued S5 at RM900mil or at a trailing price-earnings multiple of 14.2 times based on S5’s earnings.

But a fund manager poses this question:

“Why opt for a backdoor listing (of S5) instead of a direct listing? Unless S5 does not meet the earnings track record for a direct listing?”. S5 has net assets amounting to RM21.7mil and registered a net profit of RM63.4mil for its financial year ended June 30,2019 (FY19), according data from the Companies Commission of Malaysia (SSM).

With the exception of FY17 where there is no record, SSM’s data shows that S5 has been profitable between FY16-FY19, with the highest achieved in FY18 at RM108mil.

Some investors though rushed to buy ALB shares after the announcement of its plan to buy S5. It is understood that this was partly driven by the speculation that S5 is in the running to win the upcoming multi-billion ringgit NIIS project.

Since Wednesday’s closing price of 13 sen, ALB shares have risen some 220% to last trade at 42.5 sen yesterday.

This has brought its market cap from RM61.53mil to RM201mill, but that’s still nowhere close to S5’s indicative valuation of RM900mil.

On the other hand, shares of Ancom and Nylex shares did not garner much investor interest following the group’s restructuring announcement.

Back to ALB, it would need to issue a substantial number of new shares to pay for S5. More shares would need to be issued or sold to meet ALB’s public shareholding spread. This would result in a massive dilution to its current shareholders. The question also arises as to who will take up the private placement it is proposing and at what price.

Shareholding puzzle

One more issue is that the shareholders behind Merrington, the company that owns 10% in S5, remains a mystery. Recall that it was Merrington that also sold a 10% in S5 to MyEG for RM90mil.

A fund manager says that if S5 is to go public, its beneficial shareholder list would have to be made transparent.

“Investors would at some point want to know who are the people behind Merrington, ” says the fund manager.

The shareholders of Merrington are listed as Vent Millions Sdn Bhd and Barolagun Sdn Bhd, while its directors as disclosed to Bursa Malaysia are Rizwan Rasid and Darul Ehsan Ahmad. However, further checks on these companies that own Merrington did not reveal any names and involve British Virgin Island (BVI) entities.

The shareholders of S7 Holdings, which owns 76.38% of S5, are Syed Mohamad Hafiz Syed Razlan, Kamarul Baharin Ghazali and Jennie Tan Jen Yih.

As for Avocat, its sole shareholder and director is Lim Beng Guan, who is the co-founder of ZJ Advisory Sdn Bhd. Lim is also the majority shareholder of Concrete Parade Sdn Bhd, which holds a 4.68% stake in Apex Equity Holdings Bhd.

Business-wise, S5 is in the midst of winding up its Kazakhstan operations, based ALB’s filing with the stock exchange. But it is its existing business in providing national security solutions that will be very-much in focus given that the winner or winners for the NIIS project, which reportedly attracted bids from over 20 companies, has yet to be announced.

Barring any unforeseen circumstances, the proposed RTO is expected to be completed within six months from the date of the heads of agreement. S5 has been trying to go public as far back as four years ago.

In July 2016, rubber products maker, Goodway Integrated Industries Bhd proposed to buy S5 Systems for RM900mil. The purchase price was to be affected with an issuance of new shares in the listed Goodway that would have seen the entry of S5’s major shareholder.

But some seven months later, the deal was withdrawn due to “additional time that was needed to enhance the disclosures and provide the required information”. In its filing then, Goodway said it had also mutually agreed with Maybank Investment Bank Bhd, the bank that was involved in the deal, to terminate the latter’s service as its principal adviser with immediate effect.

All eyes will now be on the details of the S5-ALB deal. This is especially so in relation to disclosures needed and valuations justified that would need to meet the high standards of the capital market regulators.

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