Thursday, January 2, 2014

Divestment of Silverlake Axis and The Hour Glass

I have divested both companies around the period of October and November. Here's the reason for divestment:

Silverlake Axis

Silverlake was divested at the price of $0.795 though it went on to rise to an all-time high of $0.95. On hindsight, this looks like a mistake especially since it went up by 5% the day after I sell it. When to sell a stock seems to be a harder decision than when to buy and I know that I will never get to sell it an all-time high. Hence, the important thing will be for me to look at my reasons to sell 1-2 year from now to see if it makes sense.

The main reason is because of the high valuation of the stock which I get a bit uncomfortable of. At the price of $0.795, it works out to a market capitalization of $1.786 billion ( based on 2,247 million shares, inclusive of the 100 million share placement in June 2013). This represents a PER of 23.7 x based on exchange rate of 2.6 RM to 1 SGD and FY 13 net profit.

However, one has to take note that only the maintenance and enhancement services is recurring in nature and this accounts for only 40% of the EBIT, which works out to be around RM 92 million in NPAT. PER based solely on the maintenance and enhancement business will be around 50x. Obviously, it is not realistic to value Silverlake solely based on its recurring segment, but it should be somewhere in between. The rest of the business is largely order book driven and is likely to be more volatile in nature.

The next question will be how well is Silverlake Axis expected to perform going forward since it is the future profits that matter. Back in 2010, Silverlake Axis secured 4 contracts worth SGD 210 million, with the HNA and CIMB contracts contributing the bulk of it. Since then, they have secured 2 integration project in 2011, 2 small licensing project in Malaysia, RM 135 million contract in 2Q 2013, Hong Leong's EPP and Union Bank of Colombo in 3Q FY 2013. Ever since the bumper crop in 2010, the total dollar value of contracts secured from 2011 to 2013 are still likely to be much lower than SGD 210 million. Total software project services and licensing contract remaining should be around RM 300-350 million which is around 1.5 year of the segmental revenue in FY 2013.

Silverlake Axis cannot really be blamed since CIMB is the 2nd largest bank in Malaysia. 5 of 7 largest banks in Malaysia, UOB, OCBC, 4 of 10 largest banks in Indonesia  are already using their software. To get another project of similar size, the only potential client is RHB. Thus, it is unlikely that Silverlake Axis can continue to achieve its current level of software licensing revenue after FY 2014. At the current valuation, market seems to have priced in more than its achievable growth, believing that Silverlake will be able to grow its orderbook further than the level in 2010. 1Q 2014 results has been boosted by a RM 8.3 million gain in forex and inclusion of Merimem results.

Back when I initiated it in March 2012, the key thesis is that maintenance and enhancement profit will rise significantly such that PER based solely on the recurring segment will decrease from 20x to ~15x while the other order book revenue will serve as bonus. This has worked out and given that the market has more than priced in the growth potential, a decision to sell has been made. As of writing, price has gone to $0.910, which is at a PER of 28x. Potential catalyst will be new mega order win and perhaps the listing of its Chinese associates.

The Hour Glass

The Hour Glass (THG) was divested at the price of $1.645, at a PER of 8x. Due to the high working capital requirement, free cash flow has been around 30-45% of net profit which is a reason why it may be hard to expect much positive re-rating of stock.

Days Inventory Turnover has been more than 200 days as the luxury industry is hit by unexpected clampdown on luxury spending by the government in China since last October. Despite increase in sales by 14% from the increase in store network, profit has dropped by around 6% for past 2 quarters as gross margin has been hit. While THG has remained relatively more resilient, the margin pressure comes from industry wide inventory clearance as they are trying to de-stock. This does show the inherent weakness of retailer as the consumers identify more with the brand of the watch than the retailer. The ability to fend off competition is limited though the operation has been well managed as compared to others.

Return has been good since it was bought at 5x PER and decision to sell was made to clear off the weaker stock in the portfolio.



It has been quite some while since I last posted as I had been pretty busy with school. Not that I have given up analyzing stocks as I have actually analyzed more companies in greater detail than 2012, but it is just not blogging about it. Going forward, hopefully I will have more time to do so.

Currently, I am left with VICOM and Boustead, being in 55% cash position. There has been a lingering thought to liquidate the whole portfolio since the potential upside has been greatly reduced given current price. It is not too hard to sell away 2 stocks too. While the portfolio has delivered good return, I have also learnt about the numerous blind spots that I have missed in each companies that I have owned. I have learnt a lot more stuff over the past 2 years and it might be a good idea to restart to apply what I have learnt.

24 comments :

  1. Hi,

    Glad to see your new post after such a long hiatus.

    Agree that it's sometimes harder to know when to sell than buy.

    Have enjoyed and learnt alot from your analysis of various companies in the past.

    All the best in your studies and hope to see more posts from you in this new year.

    ReplyDelete
    Replies
    1. Thank you. I still have a long learning journey ahead and i still am not good at knowing when to sell haha

      Delete
  2. that Silverlake analysis is what is missing in this Singapore blog sphere for 1 year. thanks for being back. this place is getting quite lonely with much folks doing the stuff of prospecting companies

    ReplyDelete
  3. Wow! You are still in School and you write so beautifully and analysed so logically.
    I think with all you guys analysing stocks to death, I might have an edge in investing in index ETF, not stocks! :p

    ReplyDelete
    Replies
    1. My analysis is never perfect and I do make mistakes too. Let's learn from each other:)

      Delete
  4. Thumbs up for this article. You are definitely one of the rare few who analyses companies in-depth and provides insightful analysis.

    All the best to you in future.

    ReplyDelete
  5. Hi SGyounginvestor,

    I enjoy your articles before you went on your sablogtical break. Do share what you have learned in the past year when you are free. I look forward to reading them.

    Have a good 2014

    ReplyDelete
    Replies
    1. Hopefully, I will have the time to. Wish you all the best for 2014

      Delete
  6. Very clear thoughts... thank you for sharing! :)

    ReplyDelete
  7. Good in-depth analysis on Silverlake Axis and The Hour Glass. Actually not just these two counters over-valued. The market as a whole, is overvalued and is ripe for a good correction. Good that you have set a target and sell off your stocks at a good price. Look forward to more good stuff from you! By the way, can you update your link? I have changed my blog name from SG Web Reviews to SG Wealth Builder (www.sgwealthbuilder.com).

    Thank you.

    Regards,
    Gerald
    www.sgwealthbuilder.com

    ReplyDelete
    Replies
    1. I also think the whole market is rather overvalued.

      Delete
  8. this report by phillip says that silverlake is in the bidding process for implementing RHB's core banking software worth RM 300 mil. In fact I just understood from an industry player in KL that silverlake is indeed bidding. however, there is no further details. RHB is the last of the few bigger banks in malaysia for silverlake to win over.

    just wondering if you heard any news or find out anything abt this upcoming development?

    http://internetfileserver.phillip.com.sg/POEMS/Stocks/Research/ResearchCoverage/SG/silverlake20140213.pdf

    ReplyDelete
    Replies
    1. Sorry, but I do not have more information than what you have at the moment. But you are right, RHB is probably one of the few big clients still available in the region

      Delete
  9. i think silverlake axis has won the RHB deal, a friend of mind working with RHB has mentioned. not sure about the project amount and delivery schedule but it seems big. no announcement made but price has moved a lot.

    I find your posts interesting and would like to know more about your investment ideas, and i have left an email to your mailbox - sgyounginvestor@hotmail.com, but there's no reply yet. Thanks.

    ReplyDelete
    Replies
    1. I didn't receive the email. Now that CIMB is merging with RHB and MBSB, i supposed Silverlake wins the deal :)

      Delete
  10. Most probably SLA won the deal if the merger goes through. Do you think at current price ,it will be a good deal to buy?Thanks.

    ReplyDelete
    Replies
    1. The system integration contract will not be as profitable as new license. They will get new license fee from RHB, which should be able to replace their diminishing orderbook from CIMB contract. I will not buy it at this price

      Delete
  11. My email is Keithson_liew@Hotmail.com. hope to hear from you :) ocbc has won the deal w wing hang, potential job for SA also. SA has clinched rhb deal, according to my friend. But not sure why they nvr announced.

    ReplyDelete
    Replies
    1. Need to wait for detail on how big the rhb and wing hang deals are.

      Delete
  12. Just ran into your report today, 1.5 years after you wrote it. I just gotta say congrats because although you were a bit early, your assessment on Silverlake Axis turns out to be perfect.

    SJ

    ReplyDelete
    Replies
    1. It is good that I maintain my discipline. Always not wise to try to catch the top or bottom

      Delete