8 things I learned from the 2018 Silverlake Axis AGM

I received many requests from our readers to share my takeaways from the latest 2018 Silverlake Axis annual general meeting, so I decided to take some time to pen them down here. This year’s AGM is slightly shorter, and certainly less dramatic, than the annual meeting last year, but I hope my pointers will still give you more insights into Silverlake Axis.

Over the last 30 years, Silverlake Axis has built and maintained the core banking systems of banks and financial institutions around the region. Forty percent of the 20 largest banks in Southeast Asia are clients of Silverlake Axis including OCBC, UOB, CIMB, and Maybank who all use the Silverlake Axis Integrated Banking Solution (SIBS). CEO Raymond Kwong shared that the company currently serves 150 banks and financial enterprises with over 150 million active customer accounts making over 300 million transactions on a daily basis. Since its listing in 2003 at 23 cents per share, Silverlake Axis has returned a total of 36 cents in dividend per share since its IPO.

Just like in FY2017, this year has been a tough one for Silverlake Axis. FY2018 was impacted by a deferment in capital expenditure by banks in software project services and licensing. The delay was mainly due to uncertainty among banks about whether they should invest in their existing core banking systems or fintech. The development of fintech has sped up over the last 3-4 years and technology is changing the way we do our banking transactions today. Despite the disruption, Chairman Goh Peng Ooi believes that fintech will not replace banks; fintech is simply one of many transaction channels, and banks still need a core system to process their data. Therefore, banks must continue to invest in their core banking systems to keep up with the competition and growing transaction volumes.

Apart from its core banking business, Silverlake Axis also provides Software-as-a-Service (SaaS) solutions to insurers in Asia. Currently, all insurance and takaful operators in Singapore and Malaysia — including well-known insurers like AIG, Tokio Marine, Sompo Japan, and MSIG — use the company’s Merimen SaaS platform for their motor insurance policies and claims. Kwong said that US$3 billion worth of insurance transactions are made on the platform annually and transaction volume is likely to grow as the company expands its SaaS solutions to Indonesia, Thailand, Hong Kong, Vietnam, the Philippines, and China.

As every motor insurer in Singapore and Malaysia uses Merimen’s SaaS platform, it has a far-reaching network effect with repairers, motor franchisers, carmakers, law firms, and insurance intermediaries motivated to use the platform as well. It took Silverlake Axis almost a decade to build the network in Singapore and six years in Malaysia. It will probably take the company another 2-3 years before they can achieve a similar network effect in Indonesia.

Beyond that, here are eight things I learned from the 2018 Silverlake Axis AGM:

1. Silverlake Axis has reported a declining gross margin from 61% to 56% over the last five years. This isn’t due to a more competitive landscape but a deferment of capex spending by the banks which resulted in lower licensing revenue (which is a high-margin business for the company).

2. The acquisition of SIL Group — comprising three entities, Silverlake Digitale Sdn Bhd, Silverlake One Paradigm, and Silverlake Digital Economy — strengthens Silverlake Axis’s digital capabilities. However, a shareholder noticed the poor financial results of the newly acquired group as revenue and profit for the year declined by 13.6% and 62.3% respectively. The CEO explained that Silverlake Digitale Sdn Bhd (SDS) and Silverlake One Paradigm (SOP) achieved above 25% growth year-on-year, but Silverlake Digital Economy (SDE) lagged behind due to a delay in getting new customers. Despite the delay, he believes that SDE has good prospects to close new customers in the coming year. Chairman Goh added that SDE stands in a very good position to solve the imminent issues traditional banks will face with their legacy (old) banking systems. He suggested shareholders read ‘Who knows how to convert core banking services to platform services better than the original provider?’ by Chris Skinner. The article is a good read if you want to understand more why SDE can offer a solution to traditional banking operators in the current disruptive environment. In a nutshell, the solution to the problem is not new and it is up to the banks to decide if they want to invest now or later. Goh said that if a new banking client chooses to take up SDE, they will have to replace their core banking system with Silverlake Axis’s SIBS.

3. A core banking system is very expensive and complex software will cost hundreds of million to billions of dollars to replace. So a bank running on a legacy core banking system would rather defer upgrading it indefinitely until it is beyond repair. Apart from the heavy price tag, there are many other potential obstacles including the uncertainty surrounding fintech’s disruption, the short tenure of bank CEOs, etc. Regardless, a bank needs to have a stable core banking system to take care of its banking orders, compliance issues, and scalability. Goh believes it is only a matter of time before there’s a recovery in capital expenditure on core banking systems. With several contracts wins recently (here, here and here), Silverlake is already seeing some recovery in software project services and licensing. As new systems are implemented, maintenance and enhancement revenue will grow steadily as well. According to Goh, one client has decided to replace its legacy systems with SIBS as the system is failing. Another client is an existing customer but needs an upgrade due to a merger.

4. Related-party transactions have been declining as a percentage of revenue over the years. In FY2018, Silverlake Axis had related-party transactions which include sales of goods and rendering of services to Silverlake Private Entities (not related to SIL Group) totaling RM46 million, representing 9% of total revenue. Kwong explained that the ongoing transactions are with existing approved resellers. The transactions are in relation to the recent contract won by the private entities in Malaysia and Silverlake Axis is responsible for delivering the licensing, implementation and maintenance services.

Related-party transactions as percentage of total revenue. Source: Silverlake Axis

5. Silverlake Axis has a current orderbook of above S$300 million. When new contracts are won, the value of each individual contract is not disclosed as clients want to keep the information private and confidential. But we can still estimate the size of a contract from the length of it. The longer it takes Silverlake Axis to implement a project, the bigger the contract is likely to be.

6. The credit card and payments business is getting competitive as it is being attacked by Alipay, WeChat Pay, etc. and the margin is likely to drop over time. Kwong said that Silverlake Axis won’t enter the frontend payment industry, but focus instead on providing backend software like processing, compliance, security, etc. for payment providers.

7. One-off fees of $150,000 were paid to a few directors for follow-up audit work.  The investigation on the short seller’s allegations was carried out over a period of seven months and, as there was extra work post-investigation, Goh thinks it is fair to reward the directors for their hard work. In the end, the audit work not only cleared Silverlake Axis from the allegations, but also strengthened the corporate governance of the company.

8. A new strategic investment committee was formed in 2018. Two new directors, See Chuang Thuan and Voon Seng Chuan, have joined the board. They previously worked at IBM and have extensive backgrounds in the IT industry, and will work to strengthen Silverlake Axis’s decision-making in strategic investments.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

This article is written in support of the SIAS ‘3 Questions’ initiative to raise the standards of AGMs, and encourage minority shareholders to ask questions, engage, and interact with the management of listed companies.

Rusmin Ang is an equity investor and co-founder of The Fifth Person. His investment articles have been published on The Business Times BTInvest section and Business Insider. He has also been featured multiple times on national radio on 938LIVE for his views and opinions on how to invest successfully in the stock market. Rusmin is on the speaking circuit for CIMB Securities (Malaysia) and has spoken at events in Penang, Sibu and Kuala Lumpur and is the co-author of Value Investing in Growth Companies published by Wiley, Inc. The book can be found in all major book stores worldwide and on Amazon.com, Barnes & Noble and Apple's iBooks. Rusmin was actually a former SIAEC scholar who gave up his scholarship and a cushy career to follow his itch of learning how to be a better investor and ultimately lead a life of financial independence. He believes that anyone, even with a regular job, can achieve more financial peace-of-mind by investing intelligently and safely for the long term.

2 Comments

  1. Ang Ming Jie

    November 7, 2018 at 10:44 pm

    Good day Rusmin,

    Thanks for the sharing. Understand that the decline in gross profit margin is due to the revenue of different segment.

    However, one thing that caught my eye was the high administrative expense which reduces the net profit margin by quite a fair bit and also the growth of the expense for the past 5 years increased tremendously.

    Would like to check if you have any insight on its growing administrative expense.

    • Rusmin Ang

      November 8, 2018 at 11:59 am

      Hi Ming Jie,

      You can find the explanation in the annual report:

      Administrative expenses increased by 7% from RM110.9 million to RM118.2 million due to the pre-tax loss on sales of 4.5 million GIT shares and higher professional fees incurred for the acquisition of SIL Group and other potential investments in FY2018.

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