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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.

Silverlake Axis revenue segment
Screenshot from Silverlake Axis' 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.*

Price History*

Silverlake Axis Chart from Yahoo Finance

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.

Financial figures*

Data from Morningstar

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.

Data taken from Silverlake Axis financial results

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.

Debt levels*

Not much to mention here other than a strong balance sheet that SAL has.

Closing thoughts

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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