Friday, May 4, 2018

Random thoughts: Sillyinc's biggest investment in Silverlake


Transcipt of interview with analysts.

Disclaimer: contain forward looking statement

Q: Why is that u have such a high concentraded bet, I mean investment on silverlake axis? Given that u always proclaim to take a conservative stance when investing?

S: yes, we are still accumulating. To put it most simply, we expect core earnings to grow in double digit over the next few quarters. We find it difficult to find a company with a good yield and also growth prospects.

Q: why the confidence in growth?

S: Silverlake has been winning several contracts over the last 12 months. The most recent one being the biggest core SIBS platform with a whole suite of services. It is not a upgrade but a new customer. The earlier contract wins should begin to show its contribution in the upcoming quarter. In fact, the last quarter already show a improvement in core earnings but price continue to went south instead.

The acquistions of GOH private entities would then lift Q4 earnings and its insuretech segment is also making headways. In short, I believe it will fire in all cylinders soon and market will rerate it.

Q: whatever u are saying, the market knows, its all old news. Why the underperformance of the counter then?

S: well, there could be unknowns unknowns. But let me haphazard a guess. The acquisition of Goh private entites couLD lead to dilution of shares rather massively. It is not exactly a straight forward deal, and with razor short selling report still in people mind, people just avoid the company with a 10 foot pole.

Q: why wouldn't u then?

S: Let me try to explain. Silver lake give generous dividends, because of the profits from.sale of GIT. Is GOH shareholder friendly or at least fair, I think he is, and why not since he owned 65% of silver lake, he would want to also take his fair share of gain. Even discounting the special dividends, we believe 6% dividend is possible and sustainable.

Of course, corporate governance is important. But look at the recent deal, he didn't took cash out of the company. He took more shares of silverlake axis.

The company didn't even dilute the existing shareholders holdings by issuing new shares. Instead it transfer treasury shares to Goh. You might want to say that company cash in doing shares buyback is also money, but what Goh effectively done is injecting his Private entities in exchange of more shares using company money. That doesn't at all smell like he is exiting in anyway.

Given his cost of shares buyback of silverlake is less than the 71cents that he offer to sell.his priavte entities, the PE of the collective 3 entities is about 7. PE 7 for a deal, seems like a good and reasonable deal to.me.

Of course, profit might fall, and he could be doing a HPHT, exiting at a high, but given his track records, I doubt that is the case. He got more of the company, unlike HPHT case with Li.

Also, company is still buying back it's shares. But there is a blackout period leading to release of quarter results. I believe the buying will continue after the results is released. In fact, I felt that if I am Goh, I might want to take it private and either go list back at Malaysia or Hong Kong to command better valuation.

Q: That all sound very convincing, but shareholders are worried, and what if u get it wrong.

S: Even if we manage to accumulate all that we wanted, it would still be less than 15% of portfolio. It is currently less than 10%. Also we have stop loss mechanism in place if we get our earning prediction wrong.

Q: Any other notes for potential investors

S: It is important to.note that when licensing and special projects fulfilment increase, it's maintaince rev will.somewhat drop, but net net, it should still.be growing. Also, some might frown at family members as executive directors, but this is a situation not unique to Asian companies. YZJ has a young CEO at its flagship yard which is Ren Yuanlin's son.

10 comments:

  1. 10 to 15% cap is reasonable risk mgmt.

    ReplyDelete
  2. Hmm. Its a full stop and not a qn mark? Uncle CW, preferably, not more than 5percent

    This one will be closely monitored and will be cut to below 10 percent very quickly if things dun turn out the way I expect it too

    ReplyDelete
  3. Hi,

    I am vested in Silver lake and attended the EGM. Personally, I think Goh is an eccentric but shareholder friendly management. He is conducting share buyback to increase his stake in his business but also recently diluting EPS by issuance of new shares.

    Do take note of the sharp increase in gearing for the acquisition of the 3 subsidiaries and do your own diligence. The subsidiary earnings / cash flow are cyclical according to the management and they will need time to build up on the recurring component.

    Personally, with the shareholder-management alignment, strong cash flow, good dividends and share buyback, and under valuation, I am not too worried about the short term changes for the company. The growth story and prospects are not so well defined however. It is good to do some portfolio realignment if you believe the company is improving / deteriorating according to its fundamentals.

    All the best!

    ReplyDelete
    Replies
    1. Hi InTJ,

      Can u explain why is the a sharp increase in gearing due to the acquisition? It is fulfilled through the transfer of treasury shares. Perhaps when the earn out options in play, meaning earning growth of 25% and more happens, there might be a cash call.option ...

      If I understand the business correctly, it is like those those turnkey projects. When they are building up.platfoms, they can compensate as special projects, once it is up and running, then it become recurring. It is really fine, unless they have problems executing the project.

      Also, Silverlake is a netcash company, gearing is really something one has to put at the last row of consideration for this company, given its cash hoard and cash flow stability. Stability doesn't mean it is always growing, it means it is consistently positive and with the consistent dividend given out, one should out the mind at ease of funny business

      Yes, it might be lumpy as compared to recurring revenue but given the dearth of recognition for the past 2 years with the exception of Q2 results, I believe the lumpiness is going to be over sooner or later.

      Less than a week to find out whether I am.right.

      At the end of the day, even if I am.right about earnings, I might still be wrong about price movement.

      Before razor report, at $1 people are still shouting buy buy buy...

      Now with prospects improving and razor report debunked ... No one touch it at 50 cents.

      Funny...

      Delete
    2. Hi,

      Personally, I am not a professional investor and I believe Singapore market is information inefficient. This is just my personal opinion.

      I cannot explain why there is no upward correction for the share price. (Even Goh cant explain it in the EGM, but he is willing to buy it back). Most likely, I believe it is simply neglected / overlooked by institutional investors (whom usually propagate large corrections in share price). Personally I will prefer it to stay low for a lengthened period of time so I can see if the acquisitions are successful and then I can average up / down at low valuations.

      My understand of these 3 acquisitions is that they are buying over 3 whole business (client accounts and underlying software) and compensating the existing shareholders with SLA stock and cash.

      I believe gearing shot up because they are conducting 3 acquisitions at the same time (most companies have a slower pace of acquisitions). Any more in depth answers, you have to ask management at the AGM.

      I did my own personal analysis of the egm but please do your own due diligence as I may be right / wrong on several areas. If you are doing additional posts on stock analysis, I will love to see them as I may have missed certain areas out.

      http://sgstockotaku.blogspot.sg/2018/03/silver-lake-axis-silver-lining-in-sight.html?m=1

      Delete
  4. INTJ,

    If u read the acquisition announcement, there is no cash involved for Base consideration. Earn out consideration only considered after 18 months.

    The base consideration shares are settled via transfer of treasury shares.

    So there is no cash involved at all, and definitely no.loan for the purpose of acquisitions.

    There is also no spike in loans if u look at the quarter report, while current loans did increase it is hardly a spike and cover by 40% of cold hard cash.

    ReplyDelete
  5. Hi,

    I am gauging the future scenario for the company when I have mentioned about the net gearing and cash component. What you have analysed in indeed correct right now.

    I dropped you an email based on my personal analysis. I am typing out essays instead of short comments in the comment section lol. We can communicate there if you want.

    ReplyDelete
  6. Hi INTJ,

    I have replied your email. But for the sake of readers here,maybe j do a quite summary.

    U are talking about earn out conisderation and reading the ciecular, Silverlake will have high gearing in 2020 to pay the max cap consideration.

    So in short, I am.looking at base scenario and u are looking at earn out case, so both of us are right.

    However, as I pointed out in email, the illustration consider zero growth by the mother company silver lake itself when the 3 subsidiaries can grow 50% on average over three years. I find that assumption very problematic as the 3 subsidiaries would form less than 20% to become 70-80 percent of the company.

    ReplyDelete
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