SIlverLake Axis - Tranche 4

Thesis : Largely unchanged since my assessment last year. Cyclical company that is on the uptrend due to increase in order book(RM340m order backlog). There is general increase in IT Capex of financial institutions. There are core banking contracts (high margin)as well as several (lesser margin) Thai / Malaysian contracts that was won. The financial effects are delayed to be booked in the FY 2018 Annual reports and financial records and the market have not sufficiently priced in the fundamentals. There is understatement of the company's financial performance as most of its books value are booked in the next quarter / financial year. Project related order book value has doubled and this certainly leads to large increase in Accounts receivable and increased cash flow in the future.

The macro trend of Fintech in Asia is exceptional favorable, with Singapore Ravi menon stressing on the importance of embracing Fintech and setting up Fintech hub, UOB and OCBC digitalizing banking operations and on boarding, as well as
Penang’s Chief Minister, whom spoke of banks’ need for digital transformation and fintech disruptions in the areas of payment, loan financing and advisory service.
From my understanding in banking systems , once a core banking contract is won and migration of data between core banking systems is under way, the contract is exceptionally sticky as accounts and data migration will take several years and the costs and risk of switching to a separate core banking contract is exceptionally High. Currently, Banking Fintech is mainly isolated to attachable (external API) which acts as a middleman between core banking and external systems. IMHO the moat of core banking is still strong and not eroded by upstart Fintech players.




Projects between Jan 2017-Jan2019
Core Banking
Digital Innovation Contracts from Financial Institutions in Malaysia, Singapore and Thailand.
Silverlake Axis’ Core Banking Solution Selected for International Expansion of Leading ASEAN Bank.
Silverlake Axis' Core Banking Solution Wins Major New Banking Customer in Thailand.
Silverlake Axis Secures Core Banking Contracts from Financial Institutions in Thailand.


Insurance – Merimem Insure-tech claims processing,
Silverlake Axis' subsidiary, Cyber Village, Wins Digital Insurance Collaboration Platform Project.
Merimen Expands Regional Reach to Hong Kong.
Retail – Small presence but interesting growth opportunities.
QR Signs Software and Services Contract with AEON Vietnam.
QR Provides Retail Automation Solution to AEON Hong Kong.
Retail incorporation of QR functions (Metro)



Key Risks
Accounting nature of software companies
Accounting for technology companies can be tricky. As 2017 results are inflated due to monetisation of GIT shares, net profit attributable to shareholders for FY2018 is 10% lower than FY2017.However, large holdings of volatile but marketable liquid assets will lead to market performance inflating business performance. Operating Cash flow and free cash flow is good but much lesser. 



Acquisition heavy nature
Acquisitions are the norm rather than the exception for technology based companies. Instead of incurring capex to reinvest in future growth, it has to invest in discretionary acquisitions to develop new technologies and services in order to improve its product offerings. Goodwill inflation (plug variable) is thus considerable and book value is a poor way to assess SLA. Performance of Acquisitions could be erratic and difficult to analyse and predict. Goodwill write offs (Key risk) complicate the problem if the company overpaid and the financial performance fail to meet rosy expectations. 

 
Confusing Share Buyback policy
Share buyback policy is confusing at best. Silverlake Axis has not been strictly buying back shares and cancelling them to boost EPS, rather it was reissuing treasury shares at a premium to offset cash outflows. Nonetheless, it is not diluting minority shareholders, and there is strong shareholder interest in its existing managers and directors. There is continual share buyback throughout last year to this year.
Project execution and technology disruption
Due to the delicate nature of high specs software, once SLA have locked in a client and the service deliverable are met, there is no strong incentive for clients to change to other vendors due to high risks, costs involved. New Core Banking Systems Wins will be scarce despite its high margins, and SAAS (steady cash flows) is another important consideration. Nonetheless,fast moving nature of fintech may lead to new players developing alternative ledger solutions to disrupt the Core Banking Moat. 



Cash position running low
Due to share buyback, dividend payout, acquisition of other companies, as well as decreased GIT share price, the cash and marketable securities position of SLA has been greatly reduced. Although the winning of recent contracts should introduce considerable large operating cash flow into SLA, it could be a cause of concern if the streak of contract winnings is not maintained. 



Illiquid nature of SLA share
When I recently initiated a mid conviction position, my trade was executed partially with only 2000 shares received at the price of SGD0.40 instead  of my full order. Despite some unhappiness with my broker on partial execution and charging the same transaction fee,, it is a sombre reminder that illiquidity will need a long time horizon and significant risk premium will be required to compensates illiquidity. As per my portfolio risk management rules, I shall not average up / down on SLA further until there is further release on the financial and operating performance of the company. 


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