Wednesday, December 22, 2010

Silverlake Axis Part 2

Silverlake's Barrier to Entry
Silverlake processes more than 50% of retail-banking transactions in South-East Asia. As mentioned earlier, Silverlake's software integrates the front-end and back-end of bank operations. From lending, deposits, credit cards, banking operations, Silverlake's software handles it. As the performance of such a software is critical to the smooth operation of banks, the reluctance and costs to switch are extremely high. As a result, it's customers will very likely stay loyal. Why risk a smooth banking operation on an untested new software when the current one is working very well?

From broker's writeup: It is of no coincidence that its clients are largely Southeast Asian Banks, including six of the nine anchor banks in Malaysia (EON Bank, Alliance Bank, Affin Bank, Hong Leong Bank, Malayan Banking and AMMB) and two Singapore Banks (OCBC and UOB). In Indonesia, it has six of the largest 10 banks, including Bank Mandiri, Bank Rakyat, Bank Tabungan Negara and Bank Niga.

In my opinion, with such client base at hand, any new bank wanting to set up shop in Singapore or Malaysia will consider Silverlake as a strong software logistics support for their banking operations. Coupled with loyal clients (based on logic, since I'm an engineer and I know how softwares tend to "stick" to companies for long), it would be tough for any newcomers into the market to snatch any clients.

Silverlake's Recent M&A and Contract Wins

1) Partnership with IBM Innovation Centre
2) Entered into two contracts to supply a suite of integrated core banking solutions to the Islamic Bank of Thailand and a foreign owned retail bank operating in Thailand.
3) Majority shareholder sold 135 million shares @ $0.555. Stake declines to 73%

1) Secured two contracts with a combined value of approximately RM24 million to supply a comprehensive suite of integrated core financial solutions.
2) SAL invest US$20.35 million for 30% stake in Chinese's Unifisoft Holdings, a top 5 PRC banking IT solution provider.
3) SAL secured three new contracts in Malaysia, Philippines and the Middle East, collectively worth approximately RM29 million
4) Silverlake Axis Expands Licensing of SIBS Into Capital Markets Industry With Contract For US$7.35 million

1) SAL has secured two new contracts in Thailand and the Philippines for a total value of approximately US$6.8million.
2) Repurchased 30.3 million shares @ $0.09 - $0.12
3) Announced that banks has delayed their IT upgrading due to the crisis.

1) Repurchased 25.8 million shares @ $0.08-0.09. It holds 55.8 million treasury shares.
2) Acquired the remaining 75% issued share capital of SBI Card Processing Co.. Ltd. For S$7.6 million

1) Acquired SSB and QR Solutions from Founder for $339 million paid in the form of 1,025,635,634 new shares. Founder stake boosted to 83.6%.
2) SAL will provide cards (credit, debit and loyalty cards) and logistics IT solutions to HNA Group Co. Ltd for S$70 million
3) Bank Islam Brunei Darussalam (“BIBD”) Extend Strategic IT and Solution Provider Partnership with Silverlake Axis Ltd. (“Silverlake”). Contract sum is confidential
4) Strategic Alliance with HNA Group (total assets of RMB 160 billion). Founder agree to sell 242 million shares to HNA and placed in escrow for 3 years. HNA will enjoy all gains above $0.16/share if the shares are sold after 3 years.
5) Business Collaboration between Hitachi Information Systems, Ltd and Silverlake Axis Ltd in the Development and Outsourcing of Financial and Distribution Systems for the Japanese Market
6) Silverlake Axis to Provide Core Banking System to Support CIMB Group’s 5 year 1Platform Initiative. Its partners won the RM 1.1 billion contract. SAL share is undisclosed.
7) Secured a major core banking contract worth approximately S$30 million from one of the largest regional banks (the “Bank”) in South East Asia.
8) Founder sold 50 million shares @ $0.32 to boost free float

Why it appeals to me
1) As a primarily software company, Silverlake does not have a high Capex, but rather, the costs needed to maintain and improve the functionality of it's core banking software. In addition, the asset value of it's intangible licenses are hard to be given a concrete valuation. With it's sufficiently high ROE and ROA, I would say that the value of the intangibles are rather substantial. Of course, I stand to be corrected here.

2) Silverlake deals mainly with the financial industry. The crisis of 2007~2009 hit the financial industries hard. As a supporting industry to the financial world, Silverlake is hit hard too. This can be seen from it's financials, where gross revenue and gross profit declined substantially going from FY2008 to FY2009.
However, as we recover from the crisis, I expect Silverlake to benefit from the recovery as banks seek to reassert and consolidate their positions in South East Asia.

3) Technically, Silverlake hit a low of 8cts in Mar 2009. Recently however, it went above 35c before coming down to the current price. 33c, the price I bought, is it's 200MA region. If it gets bullish, it could break this critical 200MA line to go higher. If it gets bearish, I'm happy to average down this company.

4) Management intends to grow the recurring income segment, which is an important income moat to buffer against any volatility.

Risks of Investing in Silverlake
All investments carry some form of risks. Silverlake is no exception.
The main risk comes from it's low liquidity, so if you really need desperate cash, you might have to sell it at a loss in the short term. And this is one reason why fund managers will not be interested in a share with such a low amount of free float (<40% free float).

I shall lazily conclude this post with the management's outlook for Silverlake:

With the recovery of the Asian economies from the global financial crisis from mid 2009, the Company
was able to conclude five new contracts totalling approximately S$210 million with existing and new
customers in 2010. As confidence returns, it expects to receive more requests for proposal during the
rest of FY2011. It is in advanced contract discussions with several banks and financial institutions in
South East Asia and expects to secure more contracts and upgrades for the licensing of SIBS in

The five new contracts will contribute to a strong recovery of the software licensing and customised
software solutions business in FY2011. This recovery will add to the stable revenue generated by the
newly acquired Structured Services Business of maintenance and enhancements. The recovery of
software licensing will broaden the revenue base of the Company as well as contribute to its net profit
growth in FY2011. The Company remains optimistic of its business prospects.


  1. What are your thoughts on the acquisitions of SSB and QR? Thank you .

  2. Nice writeup. Hmmm...I'll take a look at this one later.

  3. Hi cif5000,

    SSB and QR were already related to Silverlake as they deal with the maintenance of the software. It does make sense to integrate them together for possibly greater synergy.

  4. hi JW

    from the financials it looks like silverlake is quite abit overpriced don't you think? The div yield is pretty good, but PER is 26, P/Book Value is 10x (!)...

    I'm interesting in getting maybe 5-6 lots of this too, considering that it's business model is somewhat like Oracle or Microsoft (at least the microsoft that sells windows 7 and office). low capex with high recurring revenue.

    However the stock valuation seems to be too high for me to enter comfortably...what do you think?

  5. btw, thanks for these 2 posts that alerted me to this counter and for doing most of the FA HAHA :)

  6. Hi,
    nice posts you have here! Good calls for CMA & FirstREIT! Had the same view on CMA but gave it a miss.

  7. Hi Issac,

    I did not go into the specifics of PER and P/B ratio in my posts. Was a bit lazy there. I read the following:

    In FY2010 (FY ended 30 June 2010), Silverlake Axis's profit fell 21% to RM63 million from RM80
    million a year ago. For 1QFY2011 ended Sept 30, however, profits rebounded 30% to RM23.2 million. Tan Siew Ling of CIMB Research forecasts net profit will more than double to RM142 million for FY2011, rising a further 26% to RM179 million in FY2012, giving an EPS of 6.8 sen (2.83 Scents) and 8.6 sen (3.58 cents) respectively. This would translate into PE of 11.3 times and 8.9 times respectively.
    ==> Then again, it's CIMB, and I don't really trust them so far...

    Today's news mentioned about Malaysia considering giving licenses for mega Islamic banking. Buying into this company is for expected increases in earnings. PER depends highly on the earning capability of a company. If the earnings increase, with the same price, PER will decrease. My expectations is that Silverlake's earnings will very slowly, but surely, increase over time as the financial sectors recover from their wounds, if they had any (the Islamic and Asian banks).

    IMHO, P/B ratio isn't really an accurate way to value the intangibles of a software company.

    I initiated a position of 20 lots. It depends on how you value the stock.

  8. Hi Youthvestor,

    thanks. I cut loss on China Sky (bad move on hindsight) and took profit on Breadtalk to prepare opportunity funds should CMA fall further. Pity it didn't. :(

  9. How about the terms?

  10. Hi cif5000,

    I don't understand what you meant by terms. Do you mean the terms regarding the acquisition? Were you asking on this:

    1) Acquired SSB and QR Solutions from Founder for $339 million paid in the form of 1,025,635,634 new shares. Founder stake boosted to 83.6%.

    This sort of doubled the total amount of shares. Given that these appear to be more profitable as they focus more on recurring income, acquiring them would boost the recurring income earnings segment of SAL.

  11. Hi JW

    thanks for clearing my doubt. Thought about what you said, and yep, PB value doesn't make much sense for a software company with less tangible assets like say, SMRT.

    I calculated PE ratio by using the spreadsheets you posted and dividing RM by 2.4 to SGD.

    Probably going to queue 4-6 lots this week and next.

  12. Hi Issac,

    if you were to enter, I would still suggest 33c supported at the 200MA line.

    Caveat Emptor as usual


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