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 This article is written for the purpose of knowledge sharing. It cannot be construed as an investment recommendation. Neither BUY, SELL nor HOLD calls. The idea of the written article is analysed from various sources - news, bursa announcement, market talk etc. Please seek advice from licensed investment representative for a recommendation.

CONNECT (0102)

Current price: 34.5sen

Technical target price 1: 62.5sen (Historical High and Major Wave 1 target)

Technical target price 2: RM1.60 - RM1.67 (Major Wave 3 projection)

Technical target price 3: RM2.00 - RM2.09 (Major Wave 5 projection)

    A little bird whispered that Connect would be the next vehicle of the backdoor listing (reverse takeover) for S5 Systems since the failure of the proposed acquisition in Goodway by the biggest shareholder of S5 Systems, NSA Technology back in early 2017. Some saying that the announcement could be out by next week with a potential RTO price between 50sen and 60sen! That is why it has spurred strong interests in Connect in the last few days which saw the share price jumped around 100%.

    For your information, S5 Systems is a private entity that involves in the business of national security solutions which involves the provision of security technology intellectual property the development and customisation of solutions and systems, consultancy and support in all related information technology and security industries.

    Simply put, S5 Systems is in the running and directly compete with Datasonic, Scicom, Heitech Padu, Opcom, Iris and even MYEG (who intends to purchase 118 million shares or a 10% stake in S5 Systems for a total purchase of RM90 million) for RM1.5 billion immigration system.

    The RM90 million price tag values S5 Systems at a trailing P/E ratio of 14.2x. It registered RM63.2 million earnings in FYE June 2019.

    Scenario 1: Based on the back-of-the-envelope calculation and should the RTO materialises, it would value Connect at 76sen (S5 Systems’ EPS of 5.36sen and 14.2x P/E ratio). This is line with S5 Systems’ valuation based on 10% stake that MYEG has proposed to acquire would translate RM900 million, which is at 76sen based on S5 Systems’ number of shares of 1.18 billion.

    S5 Systems' earnings of RM63.2 million are superior than Datasonic's latest earnings of RM48 million and thus, Connect (S5 Systems) should be valued similar to OR more than RHB's implied P/E ratio valuation target of 39x on Dsonic.Therefore, 39x P/E ratio on S5 Systems' forward EPS (FY20) of 5.36sen (assuming no growth from FY19 and remains the same) would value Connect (S5 Systems) at RM2.09!

    At Connect’s current price of 34.5sen, it is still being hugely undervalued traded at 6.4x P/E ratio. The potential upside would be 500%. Should the RTO materialises at 60sen, there would still be potential upside of 248%! The market is still overlooked this huge upside potential!

    Let say to be conservative in its FYE June 2020 (worst case) by applying rule of thumb of 20% discount to its RM63.2m profit due to the MCO (between March and May 2020), it would translate to RM50.6 million profit and EPS of 4.28sen. By pegging to P/E ratio 39x, it would value Connect (S5 Systems) at RM1.67! Let say apply another 20% discount to now its P/E ratio of 39x,  which is 31x, it would value Connect (S5 Systems) at RM1.34! Again, still huge upside potential from current price of 34.5sen!

    Scenario 2: What if the RTO materialises at Connect's number of shares of 367.7 million only? This would value Connect (S5 Systems) at RM2.44 (RM900 million valuation). At an EPS of 17.18sen and current price of 34.5sen, it would translate a trailing P/E ratio (FY19) of 2x only!

    Assuming conservative case for its FY20 with no growth in EPS and maintain at 17.18sen, which would translate to forward P/E ratio of 2x only, Connect (S5 Systems) would be superbly undervalued at a fair value of RM2.44 (RM900 valuation).

    Those scenarios valuations are even excluding potential earnings from RM1.5b immigration systems if it wins. Imagine its enormous upside potential in both earnings and share price! Would we see the stock hit limit up once the announcement is out or even before it next week?!

    More details on S5 Systems here. Source: https://www.klsescreener.com/v2/news/view/688578

    Technical-wise, both daily and weekly chart is in bullish landscape. The share price has broken above major resistance level of 33sen and closed at high of 34.5sen since 2008! The breakout is supported by stronger-than-average volume. This is in-line with strong interests in the stock for potential RTO story and its huge undervalued.

    MACD histogram indicator has just started to expand in positive territory (bullish zone) which means there is more potential upside in both short-term and long term. The share price is being traded above all 5, 20, 50 and 200-day SMAs.

    Next resistance: 44sen / 56sen