Saturday, March 10, 2012

Initiation of Coverage on Silverlake Axis at $0.355 - Part 1 Financial Statement Analysis

As always, I will start with the analysis of financial statement as it is definitely one of the most important part of the process. However, the standard way of analysing 10 years financial statements will not work here due to the transformation of the company since it was listed in 2003. Neither do I think that the analysis of net profit margin and return on equity make any sense.

Before I start on the financial statement lets have a look at how the company has been transformed twice since listed.

The company started out as Axis Systems, a company that provide Front-end banking solution like ATM Processing and Check Processing. In 2006, the company acquired the back-end solution "Silverlake Banking System Solution", thus allowing the company to provide an integrated end-to-end core banking solution for its client. In 2010, 3 companies were acquired under Silverlake Axis. Silverlake Structured Business provides application maintenance service to user of Silverlake Integrated Banking Solution (SIBS). QR Tech provides a retail system solution and services to retailers like Robinson and John Little. SBI Card Processing provides card processing service for Japanese group SBI Holdings.

As such, please be cautious when looking at the financial statement. Not only must 1 take into account the 3 different stages of the company, but also their revenue composition. And of course, all figures are in MYR currency, thus a need for you to convert them if you wish to compare to the market capitalisation.

Fig 1 Income Statement

A quick look and one will realise that gross margin is very high, varying from 60-78% of the total revenue. This is not unexpected given that software needs only to be created once and upgraded or maintained once in a while. The bulk of these cost comes from headcount and manpower. Total operating expense is usually between 10-20% of the total revenue. As such, profit margin is very high for this business. However, there is no much point comparing profit margin from year to year, this will be explained later on. As for profit and revenue, given the different forms that the company has taken, it will also be rather irrelevant.

Fig 2 Balance Sheet

The balance sheet is also quite clean, with min debt that can easily be cleared with cash in hand. Day Sale Outstanding ranges from 7 days to 188 days. This fluctuation is due in large part to the contractual basis of a large part of its revenue. When certain contracts get too big, it's not uncommon for receivables days to increase. As for amount due to related parties, this is in due to the difference between amount of work that has been recognised as profit, and the amount that has been billed to the customer.

Fig 3 Cashflow Statement

For the cashflow statement, capex for property, plant and equipment as well as software development accounts for less than 5% of the Profit before tax. The only exception was in 2007 where 7m myr was used to purchase a freehold land.

Fig 4 Financial Ratio

ROA and ROE are not very meaningful to me as all one needs to know is that the figures are high. Why is this so? Increasing its equity and retained earning are unlikely to be able to increase its revenue and profit as the only 2 asssets that matter are cash and its propriety software. Cash is needed for it to do its share buyback and for it to acquire other companies. As for its SIBS, it is an intangible asset that is very hard to value but is yet the core of the company.

Fig 5 Segment Reporting

And Fig 5 will explain why looking at net profit margin is irrelevant for this company. It has different segment with different profit margin. Maintenance and enhancement service is a more stable and recurring income and it generates a profit margin of 65%. The other 3 segments are all contractual and lumpy, and will thus affect the net profit margin year on year. Licensing of SIBS has the highest profit margin of 90%, followed by customised solution which is 40%. As for software and hardware product, the profit margin is at 20% as it is acting as a reseller.

Fig 5 also shows the difference between the Silverlake Axis before and after acquisition. The top part comes from the 2009 annual report where the acquisition has not taken place, while the bottom part is from the 2010 annual report which give a restated account of 2009 had the acquisition taken place then. This is what I called metamorphosis. If we check back the income statement, we will have realised that 2009 produced the worst profit to date since the acquisition of SIBS. However, given the acquisition, I highly doubt that its profit will fall to 19m MYR again.

The reason for purchase is likely to be much clearer by Part 3 and valuation will be discussed only in the last part. Part 2 will be on the Core Banking System industry of which Silverlake Axis is operating in.

Disclaimer - I am vested in Silverlake Axis which currently accounts for less than 10% of my portfolio.


  1. hi, i'm not able to click into n enlarge your there any error?

    1. thanks for highlighting the problem, I have ALWAYS had problem with formatting in Blogger as seen from my previous few posts. Anyway, it has been changed :)

  2. Hi,

    When are you going to be posting your part 2 and 3?

  3. I am pretty busy this week, hopefully i am able to publish it this Sat. Anyway, i can assure you that the wait will be worthwhile :)

  4. hi

    did u notice that over the years, the number of outgoing shares has been increasing quite significantly, which is the reason i dont really like this company thus it just keep eroding the eps by increasing the share pie.

    This is just personal view and purely for kind discussion. I appreciate your effort to publish the analysis.


    1. you are half-correct regarding this matter. The reason for the increase in amount of share is due to acquisition of its core business. Mr Goh Peng Ooi has originally treated its listing as an experiment. Thus it listed its front banking solution Axis system in the Catalist first. When it looks alright, Axis system acquired its back-end solution Silverlake in 2006 and lastly, it acquired its Silverlake Structured Business in 2010.

      All these acquisition are made through shares given that they are all under the Silverlake Group and of course its owner Mr Goh Peng Ooi. While it might seem like the share has got diluted, in fact it is good for the shareholder as these acquisition has proven to be able to at least double its core income. EPS never decrease after acquisition and has in fact multiplied as the company is allowed to issue a maximum amount of 50% more share for it.

  5. You got a point. But i do see another thing which is the AR (account receiveable) increased quite a lot over these few years, which can be quite alarming.

    Agree. Issuing more shares to acquire biz is a right move. However, i feel it must be able to compoundly grow the EPS annually. Look at the EPS, CAGR of EPS (for 9 years span from 2003 to 2011) is negative 1.3 percent.

    It looks not on track yet if we catagorize it as a good growth stock.


    1. AR spike up from 2010 as a result of the acquisition and hence increased revenue. It will of course be a concern but given the higher value contract that it has, receivables will be high.

      And the thing about acquiring biz is not exactly correct. let's put it this way, Silverlake Axis has always been a group held under Goh Peng Ooi before it was listed. In 2003, he decided to experiment with listing in SGX by listing axis system first. When he felt that it's working well, he went on to "acquire" Silverlake. But in fact, Axis has always been a subsidiary of Silverlake such that a huge portion of the business comes from Silverlake. Therefore, it was only in 2010 that the whole Silverlake Group has been completely listed.

      And i have never say that it was a good company before 2010. In fact, I will not even have considered it.

      Before the final "acquisition", the company has been one in which it is highly project based. As such, it is the kind where if there is no project, revenue will drop sharply. This company will then be facing its death when majority of the banks have changed their core banking system.

      After the final merger, revenue base has changed and I will talk more about it in Part 3.