Thursday, 27 August 2015

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:

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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  1. Hi Some Ideas

    You may want to consider the short-seller's report on Silverlake Axis before purchasing. At least know why the stock prices dropped so much. However, it doesn't mean that it is not a good investment. It could go all up if the report is not true.

    1. HI Frugal Daddy,

      Thanks for bringing up this point, I'll take a look through the short seller report and update this post soon :)

  2. Some personal opinions on this ...

    A software engineering company typically needs a lot of cash because a major part of their cost is manpower. So I would view the cash and near cash holdings with a pinch of salt. It could burn through the cash very quickly. They need the cash to pay the salaries. As an example, let's say it costs $100,000 per software engineer (inclusive CPF/EPF and overhead costs) per year, 50 software engineers is $5 million per year.

    With tech companies, the "moat" could be temporary. The story could be good now, but when a change comes, it tends to be disruptive and sudden - i.e. shock. So need to be conscious of this risk.

    1. Hi Lizardo,

      Thanks for your extra insight into the software industry. I agree that we should take the cash that the company has with a pinch of salt and it's possible that the company could fall just as quickly as it grew it's earnings.

      But i feel that the economic moat of the company is not bad as I can imagine companies being unwilling to switch their outsourcing of transactions to another possibly less reputable company

  3. U should read the 42 page report first, aftet which u will realise that this counter is very risky and speculative

    1. Hi Felix,

      While some of the points that the short seller report brings up do bring alarm, up to this point, we're still not sure of the accuracy of their claims.

      I'm still a little skeptical on their claims as well and think that we should take it with a pinch of salt. (But one of the points that I find worth noting in the report is the related party transactions).

  4. Hi,

    Its been while since this article, but I wrotte a post in the singapore young investing blog, and it would be interesting to know your thoughts:


    I just wanted to ask if you had the chance to read the report from Deloitte. I did it lately and it seems to demonstrate that everything was done correctly and that the main issue was communication. According to the report the majority of the purchased Goh’s private companies were done at a reasonable price. They have also contributed greatly to the company results bringing value to shareholders.

    On the related party transactions everything looks ok. For example the margins are in line with other software providers.

    After the price debacle and stabilization I am considering to start a position, but there is something that holds me back. I cannot understand why the public and the private companies relationship has evolved this way. Why is not everything integrated in Silverlake Axis Ltd or even the other way around why is Goh not taking it fully private? What was the reason for Goh to have Silverlake axis listed and shared with the rest of the world?

    To the first question SAL board answered that Goh's private companies are oriented to research, technology development and so on, so they were much more risky in nature and they do not fit with SALs business philosophy. This claim is very difficult for me to prove although seeing Goh’s personality makes sense somehow. But still, why not integrating SAL in Goh’s private holding?

    I would love to hear your opinion on all this.



    1. Hi daskaptal,

      I read the report as well and had almost the same thoughts of starting a position in the company. For me, what has been holding me back has been the relatively high P/E ratio of around 16 (compared with other companies), so I'm hoping for it to drop further before entering it.

      Anyway, that's just some extra info. One reason why Goh may want to keep SAL public is for ease of raising money from shareholders and unlocking the profits from the company by selling some of his stake in the company. I think those two are the main reasons for not taking SAL private