Silverlake Axis - Update

This has been a company which I was hoping to get before the short seller allegations and even after I was considering (I wrote a post during that period, but it was after the share price had recovered from the sudden drop) But now, with the company's share price declining since it's ~$0.70 peak to $0.49 in the past week, I decided to invest a bit in the company

To start off with the usual profit and loss statement. For FY 2015, the company generated 10.48 sen per (diluted) share after accounting for the 1 for 5 bonus issue last year, which is ~3.5 SGD cents per share at current exchange rate, which gives a pretty healthy P/E ratio of around 14.5 at the last traded price of $0.505. The net profit of the company has also grown substantially, from RM 115.3 million in 2011 to RM 282.7 million in 2015. Looking at the 9M 2016 financial results, the net profit of the company has dropped by 5%, but the company attributes part of this drop to the costs in consolidating its new acquisition, Symmetri Group and professional fees for the report in response to a short seller report by razor99

The balance sheet of the company at the end of 9M2016 looks quite healthy, with the company in a net cash position, but I would take this with a pinch of salt, as Lizardo commented on my previous post on the topic, as the company may burn through its cash reserves quickly with the high staff costs in the software industry (which are not dependent on the revenue of the company). There is also a large amount of intangible assets on the books but this is to be expected since its primarily a software company. The book value of the company is quite low relative to the share price of the company with a price to book value ratio of almost 7 at current exchange rates (and this already includes the intangible assets)

The FY 2015 cash flow statement of the company looks quite positive, with the company generating positive net changes in working capital and the company using its cash to invest in short term money market funds and acquiring subsidaries. The company also has not increased its net borrowings in 2014 and 2015 under financing activities (however, it has done so in the 9M2016 financial statements using revolving credit).

I think that the company's business model and its growth is sustainable. While banks are cutting down on large capex investments, they seem to see the importance of investing in technology and software improvements, so the company would be able to capitalize on this. Its market position looks good as well as it serves 40% of the largest banks in SEA, which may be important as it sounds difficult for large financial institutions to use software solutions from a company with a weak market position or lack of track record.

The company has also engaged Deloitte & Touche to conduct an independent review of the allegations in the short seller report by razor99. This report gave some recommendations to the company to make it more transparent, but refuted most of the claims (there are still some concerns over the lower R&D costs of the company though).

So, in conclusion, while the company's book value does not provide much of a cushion, the profits and the cash flow seem quite promising and I think that it has good future prospects. With the most of the doubts cleared after the release of the Deloitte independent report and decline in the share price recently, the company looked like quite a good buy so I invested a bit into it at $0.51 earlier this week


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