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UOB: Silverlake Axis Potential Upside of 23%
Aspire, Hot Picks | 14 September 2015
By: Raymond Leung
Articles (142) Profile

Silverlake Axis (SILV) was attacked by a short seller known as “razor99”, who released an online report accusing the firm of fraudulent accounting practice. Circumstances were made worst when SILV released the less-than-rosy results of their latest financial quarter. This is the second company on SGX to come under attack this year after Noble Group. So, this a case of real exposed fraud or a malicious attack for the purpose of self gain?   

The Attack by Short Seller
A report was released online through Value Investor Club and Dropbox by an unknown short seller, razor99. In the 42 page report, it was mentioned that SILV’s founder and chairman, Goh Peng Ooi, operates numerous private entities through a complicated structure and gains from it by inflating their financial results prior to selling it to SILV. The report compared the firm to other fraudulent IT companies such as Longtop Financial and Satyam Computer Services.

More information of the report can be found here (http://www.valuewalk.com/2015/08/the-unbelievable-financial-alchemy-of-silverlake-axis-razor99/99999/).

Is Silverlake Axis A Fraud?
After the initial publication of the report, the counter fell by 24 percent on the next trading day. This is due to the panic selling of retail investors after these serious allegations. In a statement filed with SGX, SILV commented that they would be seeking legal advice against this report and would be engaging Deloitte to undertake a review on the allegations. Findings and conclusions of the issues highlighted by razor99 will be published by SILV in due course.

The author Razor99 is not known before he published the report. How much credibility does this report have? Recently, NT Asset Management became a substantial shareholder of the counter through its NT Asian Discovery Master Fund. NT Asset Management is known in the hedge fund industry for investing in Small Caps counter in Asia Ex-Japan markets.

Profits Falling Behind Expectations

Source: Revenue of Silverlake Axis, Financial Times

Source: Net Profit of Silverlake Axis, Financial Times

Revenue for FY15 of SILV remain relatively flat as it grew by a mere 3 percent year on year (yoy) to RM516 million from RM500.1 million. Net profit surged by a stronger 14 percent yoy to RM282.7 million from RM248.9 million. This was mainly contributed by an accounting on dilution of interest in China following its IPO. SILV’s slower revenue growth, on the other hand, is brought about by slower hardware sales in comparison to FY14.

Will The Weak MYR Affect Its Payout?

Source: Dividend History of Silverlake Axis, Financial Times

SILV has been well liked by investors for its high dividend payout that is growing yearly. They are committed to paying out at least 90 percent of its profit despite not having an official dividend policy. Investors need not worry too much about an unfavourable currency translation as the firm’s revenue mainly constitutes of SGD, with MYR below 20 percent.

On the contrary, SILV may stand to gain from the weaker MYR rather than making a loss. This is due to the fact that the company is based in Malaysia and pays the bulk of the salaries of their staff in MYR. Should the currency remain weak, we can expect a reduction in staff cost after translating it to SGD.

Recommendations
Analysts from UOB Kay Hian Research gave SILV a “Hold” call even though it has a potential upside of 23.4 percent. Slower growth in the license and project service segment in the medium term, and growth in market risk premium are cited as the main reasons for the call.

At the same time, they believe that there are more that the management of SILV can do to address investors’ concerns such as increasing its transparency and strengthening its corporate governance. However, the current low valuation of SILV still makes it attractive to investors.

Note: Investors are recommended to do their own research and exercise caution when trading such counters. 

Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.


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