Silverlake Axis Review: Should I Invest? (Q3 2019/20 Update)
Updated: Jun 7, 2020
This post was originally published on 2 Feb 2020 but some revisions have been made to include updates from their recent Q3 result. From time to time, I may edit this post should I find any significant changes to the company. To make it simpler for readers, I have denoted the changes with an asterisk '*'.
Can you imagine owning a bak chor mee stall and your stuff is so good that more than half of your customers keep coming back? Certainly sounds like great success there!
The same analogy could be applied for Silverlake Axis as 62% of its revenue is recurring based on their 2019 annual report.
For those unfamiliar with Silverlake Axis (SGX: 5CP), here is a quick introduction. Silverlake Axis (SAL) is a software solutions company established in Malaysia and has been disrupting the banking, insurance, retail, payment and logistics industry. The stock quickly gained popularity among investors soared by 70+% within 3 years.*
However, a short seller that goes by 'razor99' published a report in 2015 which refuted SAL's financial figures. It spooked the market which set the stock to plunge by over 50%. Despite the management's effort to clear its reputation from short seller's allegations by engaging Deloitte to review, the stock continued to trend downwards till this day. From its peak in 2015, the share price of Silverlake axis has fallen by over 75%. At the point of writing, Silverlake Axis is trading at $0.255 per share with a trailing P/E of 9.4 and yielding at 6.67%.
Does a company that operates in a niche area with little competition deserve such low valuation? This is how I wish to approach the subject in this post.
Before I continue rambling, just want to point out that I'm currently invested in this stock so everything I mentioned here is strictly my opinion and not to be taken as any form of investment advice. Please do your own due diligence.
SAL's revenue is rather inconsistent in nature as it is largely dependent on whether new big contracts are secured. Since SAL's software solution comes with a hefty price tag so new contracts are something that doesn't come by easily.
Even so, gross margin has been consistently high at about 60%. After deducting away operating expenses, the rest is converted to free cash. ROE is at 38.3% which is triple of STI's average.
This irregular revenue behaviour will soon change since maintenance and enhancement services (a recurring segment) has been increasing at a rapid pace and will smooth out the fluctuations in the future.
As shown in the chart above, SAL experienced a 300% increase in the recurring segment from 2018 to 2019. Based on the trend, we can expect further growth in maintenance services in 2020. Do take note that the values for 2020 is as of the recent Q3 result.
It is encouraging to see SAL is not as affected by COVID-19 as compared to other companies.
Not much to mention here other than a strong balance sheet that SAL has.
Why I like SAL:
Niche business of providing customized software solutions to banks
Increasing need for FinTech for financial institutions to remain relevant: Market disruptors such as cryptocurrencies and Grab
High entry barrier: Customers would prefer an established and reputed solutions provider instead of start ups
Repeat customers: Easier to make software changes than to replace the software
Prominent clientele: CIMB, UOB and OCBC
Well positioned in South East Asian (SEA) region compared to its competitors: I believe it is an important factor when considering post sales support
Increased stability with their SaaS segment in insurance that has seen high adoption rate among insurers
Low Current and Debt/Equity ratio
Company has been buying back its shares
What are the risks involved:
Inconsistent revenue as it is project based
Inconsistent dividend yield
Lack of information on its products and solutions: Difficult to gauge how it fairs against competitors
Revenue will be affected when financial institutions reduce its investment in FinTech during economy downturn
Most of its business are from Asia which may lack of diversification
Subjected to FOREX risk: Revenue is in Malaysia Ringgit
Share price is easily affected by Malaysia's politics: "Game of Tuns"
If investors are willing to look past the short seller's allegation, SAL is an attractive business to invest because of its low valuation and deep moat.
As mentioned above, I'm currently invested in Silverlake Axis at an average price of $0.32 per share. If the market turns bearish, I would consider to average down further.
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