Silverlake Axis

Since I haven't done a share analysis in a while, I'm going to cover Silverlake Axis in this post, it's one of the shares that has been hit badly in the current market. This share has dropped from around $1 per share to a price of $0.45 yesterday and then climbing to its current price of $0.55. So, is it worthwhile looking at this share as an company that is just having a bad day or is it on its path down?

(Image source: http://www.forbes.com/companies/silverlake-axis/)

Just some background to the company. It's a provider of digital economy solutions, selling products such as Silverlake Integrated Banking Solutions to banks to process their daily banking transactions, provides outsourcing for credit and cards in Japan and core banking, retail and payment solutions for their customers. 

This business model from what I understand seems quite good as it provides software to process payments and transactions for companies, especially banks (40% of leading Southeast Asia banks use their banking solution). This seems to be a good economic moat as I imagine that companies are unwilling to takes risks to change their software provider unless a competitor is able to provide a much more competitive product to convince them to change.

(Source: Silverlake Annual Report 2014)

The profits of the company have grown in the past 5 years (in RM terms). The company may be on to something that allows it to grow its profits over the past 5 years consistently. Maybe it's companies that are moving to outsource their payment management to cloud companies to reduce costs. Also worth taking note is its increasing net profit margin. During this period, the revenue has also increased, except for 2013, which along with the increasing profit margin suggests that the company has relatively high fixed costs and that as the company expands, they may not have to incur much more variable costs.

The company's balance sheet also raises no alarms. The company has sufficient cash and bank deposits to settle its liabilities more than 2 times over. Looking here, we also find that the company has a very high ROE, around 40%. This is the thing that attracts most of my attention when looking up at the financial statements up to this point. Some people may find a high ROE a good thing as it means that any additional capital injected into the company may earn similar returns, but I have quite mixed views on this as a high ROE would lead to greater competition as other companies try to get a slice of the pie and may push profits down in the future, so the economic moats that the company has is very important to its profitability.

Cash flow for the company seems healthy for 2013 and 2014, without a lot of cash being tied up in working capital. The company has been using its excess cash to invest in money market funds and short-term bank deposits, which is good to make good use of the money on hand while maintaining a healthy balance sheet. More subsidiaries have been acquired, which would help the company grow in the future as well.

Overall the company seems to be quite safe. If we look at the share price, it also seems to be a good investment (even though the price has risen quite a fair bit from its low yesterday). It's P/E ratio is around 15, which is not extraordinary for a company, but I think that the company has possible growth prospects that when fulfilled, will reduce the P/E ratio of the initial investment. One of the main issues I have is the high P/B ratio, above 7, which provides little margin of safety for the investor if the judgement is wrong and the company goes downhill.


Now on to some of the other factors that may affect the company. The recent short seller reports seems to have brought the share price of the company down drastically. One of the points that I find worth noting in the report is the large amount of related party transactions, which is something that we may want to be wary of. Related party transactions make up slightly more than 20% of the company's revenue. Other than this point, I find the other points, such as inexplicably high profit margins, undisclosed off balance sheet financing, chairman profiting at the expense of minority shareholders and declining product competitiveness more subjective or harder to prove, so you may or may not want to take them into account, but I'm not so sure. (You can read the summary of the short seller report here, but take it with a pinch of salt as the writer as of this point is just an anonymous person, who may have an ulterior motive)

The dropping Ringgit to Sing Dollar is another factor weighing down on the company. While the company has operations in other countries, I think it's largest market is Malaysia, so the dropping Ringgit will affect the returns of the company to Singaporean investors. The Ringgit may continue to fall against the Sing Dollar with the ongoing uncertainty in the political scene as well as the falling commodity prices. But then at current prices, the company may still be too good to avoid it because of this factor.

I can't think of any other factors that may affect the returns of the company to its shareholders other than the dropping Ringgit to Sing Dollar. This company seems quite good due to its growing profits and healthy balance sheet as well as cash flow, but then we may want to a be bit wary of its high ROE, which may draw more competition into the industry, dropping its profits in the future. The short seller report may also have some points that turn out to be true, which is another thing that we would have to look out and be careful of (we can wait for the company's reply on the issue to better manage this risk).

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