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.
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.
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.
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.
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.