Thursday, May 4, 2017

Random update on Silverlake axis

Recently, Silverlake axis has perform poorly in terms of price, especially as compared to iFast, which did better due to a few reasons: a) Positive outlook by management b) better results and 3) insider buying.

I realize the Cash Cow of Silverlake recently is having tough time.

GIT price has already halved (http://www.hupogu.com/S/SZ300465/view-post) and is planning a big acquisition spree. Its latest quarter is bleed almost 15 mio, so it is about 3 mio Sing dollars or 9 mio ringgit. Silverlake holds slightly less than 10% of GIT so its associate loss should be less than 1 mio. It would have change from a 2 mio profit to a 1 mio loss such that 3 mio is gone. But that is less than 3% of it gross operating profits.

There is also concerns what type of private entities of Mr Goh is going to inject into Silverlake. From the previous executive report by Delottie Singapore:

"One further SPE that accounted for 7.5% of the IPT revenue transactions and 85% of the IPT purchase transactions is an active company primarily engaged in the business of providing implementation, modification and integration of software solutions. This SPE has generated substantial revenues over the Review Period but has incurred losses and has a net deficit position as at FY2014. Mr Goh highlighted that the overall deficit position at FY2014 was mainly due to incurring technical resource costs for enabling and supporting disruptive technologies business model, and that this SPE did generate industry level profits on its transactions with SAL. "

and 

"65% of IPT revenue transactions were with 2 SPEs which are investment holding companies. These companies acquired the software to enable other SPEs to develop, improve, enhance and modify software and assets both for long term disruptive technology R&D and future digital economy solution development for commercialisation purposes."


There is no real value-addedness if the injected assets are the investment companies beside that of corporate governance. In the executive report, "Given the significance of the values of these contracts (about RM49 million) which the Silverlake Private Entities on-sold to end-user customers and acted as the contracting party, there should be better clarity and transparency in the determination process of whether the SAL Group or the Silverlake Private Entities would be the contracting party with the end user customer. The decision and the rationale should be documented and submitted to the AC on a periodic basis. This should be in addition to and separate from the current process to obtain the AC’s consent for Structured Services Business relating to the SIBS software." This problem will be eliminated if these 2 SPEs are injected.

However, the "competitor" of  "providing implementation, modification and integration of software solutions" can be a good asset if the SPE has turned in good profits. 

Silverlake has announced various contract wins through CBV and Merimen over the last 2 years, but revenue is still falling. I think the 1 year is enough incubation period. It would be interesting to see how its recent acquisitions are good diversification or diworsification.

Whatever the outcome, the record earnings from its staggered disposal of GIT in 2017 is a given. GIT might be a salted egg going forward. Based on my calculation, the break even price for GIT for silverlake is 4.9 RMB. It is still a muti-bagger at current depressed price of 12 RMB.

And Silverlake has been continously selling out from 20 RMB onwards.

I still think Silverlake has a good execution. Its recurring base of maintenance and enhancement has been growing. The insurance unit is growing too.

Going forward, I see 2 catalysts (POSSIBLE)

1) turnaround in earnings due to uptick in project servicing and licensing
2) Special dividends due to GIT sales.

Risk.
1) If 1) doesn't materialize and we get 400 mio rev from maintaince and lower margin of 55%. we get 220 mio Ringit, and the rest of the segments break even. after tax and NP of 200 mio, we will get 2.4 cents EPS. It would mean it is overvalued in terms of PE and assume 85% payout at current price we get 3.7% yield. Not too bad. But this overvaluation will only happen in 2018 since this year has GIT to slaughter. I would think this projection is very conservative given how aggressive Silverlake is going to SEA.

2) I think is not if there is no special dividends but the amount of special dividends. Silverlake has already announce intention to continue to sell GIT in this quarter, ASsuming full year EPS of 10 cents and they give 50% payout, 5 cents is good 9% yield.

I think there are many other operating risks involved too, but I thought I have the risk-reward profile in my favor for this one. I like to blog about a company just before their quarter result so that I dun tell myself little lies to deceive myself.

(Vested and biased) 

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