This article first appeared in The Edge Malaysia Weekly on November 11, 2024 - November 17, 2024

LAST Monday, Datasonic Group Bhd (KL:DSONIC) announced that it had bought 51% equity interest in Innov8tif Holdings Sdn Bhd for RM40 million in cash from Revenue Group Bhd (KL:REVENUE).

Innov8tif Holdings and its subsidiaries Innov8tif Solutions Sdn Bhd, Xendity Sdn Bhd and Innov8tif Solutions Co Ltd (Innov8tif Cambodia) are involved in providing identity assurance solutions such as e-Know Your Customer (e-KYC) and e-Know Your Business (e-KYB), customer due diligence and ID authentication, according to Datasonic’s filing with the stock exchange.

Datasonic said the deal was a strategic move to acquire the readily available digital ID assurance and digital onboarding businesses of Innov8tif group to complement and enhance its existing business as an information and communication technology (ICT) solutions provider.

While Innov8tif may not be familiar to many investors, the shareholders of Green Packet Bhd (KL:GPACKET) and Hong Seng Consolidated Bhd (KL:HONGSENG) would certainly know about the group.

More than three years ago, Green Packet bought Xendity Pte Ltd (XPL), which owned Xendity Sdn Bhd, from its shareholders for US$10 million in a cash-plus-shares deal in February 2021. The major shareholders of XPL were Sia Hui Yong and Sia Hui Min (27.925% stake each), Wong Horng Yuen and Tan Koon Ming (11.875% each), Lee Yuan Hui (9.22%) and Mohammad Hasan Rasheed Gharaybeh (5.17%).

In its announcement to Bursa Malaysia, Green Packet highlighted that Xendity’s e-KYC technology would accelerate the development of its e-KYC solutions and contribute to its cloud computing business.

At the time, Green Packet’s unit Kiplepay Sdn Bhd had a tie-up with Tencent Cloud to leverage the latter’s facial recognition and machine learning capabilities to build a localised e-KYC solution.

Through Xendity, Green Packet would gain access to its e-KYC software, which the group said would allow it to meet the eligibility criteria to participate in Bank Negara Malaysia’s e-KYC Financial Technology Regulatory Sandbox programme.

The purchase consideration was to be settled through a combination of cash and issuance of Green Packet shares to XPL’s shareholders, over three tranches. The cash payment amounted to US$1.5 million, of which US$600,000 would be used to settle Xendity’s debts.

The issuance of the first tranche of shares was to be within 30 days of the closing date of the share subscription agreement (SSA), involving US$3 million worth of Green Packet shares. Meanwhile, the issuance of the second and third tranches of shares was conditional upon XPL achieving specified gross revenue targets and certain conditions for the financial period from July 1, 2020, to June 30, 2021 (FP2021) and from July 1, 2021, to June 30, 2022 (FP2022).

Under the SSA, XPL had to achieve US$2.23 million in gross revenue in FP2021 before US$2.75 million worth of shares (second tranche) could be issued to the sellers. Then in FP2022, the company had to generate US$4.52 million in gross revenue before the final tranche of shares could be issued.

Green Packet sold XPL’s unit Xendity to Innov8tif Holdings two years later, on Jan 20, 2023, for RM17.5 million cash.

In the announcement to Bursa on the divestment of Xendity, Green Packet stated that Xendity’s revenue for the six months ended Dec 31, 2021 (FP2021) was only RM1.15 million and it suffered a loss after tax of RM2.35 million.

For the financial period ended Nov 30, 2022, Xendity’s revenue came in at RM2.75 million and registered an after-tax loss of RM1.22 million. While the financial periods are not the same, it is safe to assume that Xendity did not achieve the gross revenue targets under the SSA.

At this point, the sole shareholder of Innov8tif Holdings was Soh Peng Nam who, together with George Lee and Law Tien Soon, founded Innov8tif Solutions in August 2011.

In Green Packet’s first filing on the divestment dated Jan 20, 2023, it said the aggregate original cost of investment in Xendity was RM28.38 million as at Feb 2, 2021.

In another announcement a week later, however, Green Packet disclosed that the original cost of investment in Xendity was barely RM2.54 million, with the bulk of it — RM2.44 million — made on June 23, 2021. It added that the carrying value of Xendity was RM13.9 million.

Green Packet told the stock exchange regulator that the rationale to divest Xendity was that the business would require extensive funding, highly skilled manpower and continuous enhancement of its solutions in order to remain competitive.

Before Innov8tif took over Xendity from Green Packet, it is worth noting that ACE-Market listed Securemetric Bhd (KL:SMETRIC) bought into Innov8tif Solutions in September 2021. 

Securemetric acquired 10% of Innov8tif Solutions from Cha Weay Chia for RM4 million.

Cha was the fourth largest shareholder of Innov8tif Solutions, behind the three founders (Lee, Law and Soh). The company also specialises in e-KYC, the same business Xendity is in.

Innov8tif Solutions was valued at RM40 million, about the same as Xendity when it was acquired by Green Packet. In fact, Securemetrics compared the valuation of Innov8tif Solutions with Green Packet’s acquisition of Xendity.

Securemetrics says the net profit of Innov8tif Solutions in 2020 stood at RM509,876, while its net asset value was RM1.8 million. In 2022, Innov8tif Solutions’ revenue was RM12.57 million with a net profit of RM477,385.

One week after Innov8tif Holdings bought Xendity, the former’s shareholder, a vehicle called Innov8tif Consortium Sdn Bhd, sold a 51% stake in Innov8tif Holdings to Hong Seng for RM30.9 million in cash on Jan 31.

According to filings with Bursa, both Innov8tif Holdings and its shareholder Innov8tif Consortium were incorporated on Jan 18, 2023. Soh, Law and Lee controlled the company with a combined shareholding of 66.17%, while Securemetrics held a 20% stake.

“With both Innov8tif Solutions Group and Xendity under the same roof, Innov8tif Holdings will be able to create a synergy between both companies to enrich and accelerate the research and development of the service offerings to roll out more products that are suitable for the new target markets and wider user/customer groups in line with its plan to strengthen its presence in the Asean markets,” Hong Seng said in the announcement on the acquisition.

“The combined resources, expertise and capabilities of both companies will allow Innov8tif Holdings to achieve greater efficiency and reduce operational costs, which will eventually generate higher profits for the group.”

In the financial period ended Dec 31, 2022 (FP2022), the Innov8tif Solutions Group made a net profit of RM469,809 on the back of RM12.5 million in revenue. The group’s revenue had grown over a three-year period to FP2022, from RM8.59 million. However, its annual net profit remained less than RM550,000 during the three-year period.

Meanwhile, Xendity was still loss-making as at Dec 31, 2022 (FY2022), with a net loss of RM3.79 million on the back of RM3.08 million in revenue.

The SSA between Hong Seng and Innov8tif Consortium became unconditional on May 2, 2023.

Ten days later, on May 12, 2023, Hong Seng entered into an SSA with Revenue Group to dispose of the 51% stake in Innov8tif Holdings for RM36 million in cash. This means that in just 10 days, Hong Seng had made a RM5.15 million gain on its investment in Innov8tif Holdings by selling it to Revenue Group.

When Hong Seng signed the SSA with Revenue Group, it had yet to settle its outstanding payment of RM24.4 million to Innov8tif Consortium. However, it already held the beneficial interest of the 51% stake in Innov8tif Holdings.

Hong Seng said in the announcement on the disposal that being a new entrant, it had no prior experience in the digital industry and would be dependent on its partner Innov8tif Consortium to grow the businesses of the Innov8tif Group.

However, when Hong Seng purchased the stake it explained that a stake in Innov8tif Holdings would provide an initial foray into the digital industry. It acknowledged the acquisition would enable it to leverage Innov8tif Consortium’s expertise in the digital industry.

“For long-term prospects, Innov8tif Group will require additional funding and time to widen its targeted market as well as to enhance its offerings and services in order to strengthen its presence in Asean markets. Therefore, it will require a longer gestation period before the group is able to recoup the investment made to generate higher profits,” said Hong Seng.

This is nearly the same narrative of Green Packet when it disposed of Xendity to Innov8tif Holdings.

Revenue Group appears to have held the 51% stake in Innov8tif Holdings for a longer period compared with Hong Seng. The group, which saw the emergence of new shareholders last year, sold the stake recently to Datasonic — more than a year after it bought the shares — for RM40 million in cash.

This time around, the 51% stake in Innov8tif Holdings had grown in value to RM40 million, from RM36 million in about a year.

In the financial period between Jan 18, 2023, and Dec 31, 2023, Innov8tif Holdings generated revenue of RM18.24 million. However, the group registered a loss after tax of RM907,988 for the period.

Innov8tif Holdings recorded revenue of about RM14.24 million for the eight months ended Aug 31, 2024. The firm achieved a profit after tax of about RM1.4 million during the period.

Revenue Group provides a profit guarantee of RM2.5 million for the financial year ending Dec 31, 2025 (FY2025) and RM3 million for FY2026.

Within just four years, five public-listed companies have been involved with Xendity and its holding company Innov8tif. How long will Datasonic hold on to the 51% stake?

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