Silverlake Axis

[mrEngineer]

I personally dislike the low liquidity and free float making it less volatile and less attractive to funds even though market cap of 600m.

Vested.

[JJW]

Am trying to read up on this company too.

Anyone has any thoughts on the massive number of shares issued for the acquisition of Silverlake Solutions and QR Technology back in early 2010? Seems dilutive to minority shareholders.

[secretinvestors]

My personal take on this stock:
Very good fundamentals with potential economic prospects but current price is fully valued with little margin of safety.
Coupled with a relatively low current dividend yield, i would probably wait for price to (hopefully) drop before entering.

[mrEngineer]

I think the real barrier of entry for silverlake axis is goh peng ooi ideology on growing silverlake business:

http://www-07.ibm.com/servers/eserver/in...e_Q308.pdf

Search for Goh Peng Ooi interview (page 38). It is also explained how Silverlake name came about.

I will appreciate greatly if anyone can try to explain a little more on the IBM AS/400 or Power Systems and BPSOD and their upcoming trends.

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If you invested in Silverlake Axis, you may remember the System Access Limited, which was bought over by Sungard in 2006 at very high price.

Prior to this, i noticed that System Access share kept going up from 11 cents to 30 Plus in the span of 2 months and i had plenty of time to buy in but i resisted because System Access financial numbers were not good (I was suspected they may not be able to continue as a "going concern" in a few years time), that proved to be a mistake, Silver Lake was bought over buy Sungard at 0.36 $, 03 times higher then i started noticed it so there must be something good at that company and you can't see it through reading financial figures or AR.

I was really puzzled at the way the share price going up, constantly and predictably for a long period of time so there must be some things people knew, sure enough, a year later, MAS fined some people for inside trading but i guess, this is just a drop in the ocean and MAS just do what is evidently known to them,

http://www.mas.gov.sg/news_room/press_re...r2007.html

Coincidently, Sungard was privatized by "Silverlake", a private equity firm at a premium offer.

For that reason, i think it pay to watch out for Silverlake Axis and we have to look further than just the number.

The company that acquired Sungard was Silverlake Partners (private equity firm) and I do not find any of the management team of staffs related to Silverlake Axis.

Therefore I conclude that Silverlake Partners and Sungard has no relationship with Silverlake Axis and the issue on insider trading is irrelevant for Silverlake Axis.

Here are the links:

http://en.wikipedia.org/wiki/Silver_Lake_Partners

http://www.silverlake.com/partners/conte...m-partners

http://www.silverlakeaxis.com/2nd/board.html

[mrEngineer]

One question on Silverlake that hopefully fellow buddies can share some insight. The company has much higher NAV and asset value than the group balance sheet. Yet the liabilities of the company is much lower than the group in the recent result release. I wonder how is that possible as usually the group has to have more than 51% control over the company and have to fully consolidate the business. Unless at group level the assets are net off with the subsidiaries under the group level and only shows the net asset level.

Is this a red flag of abnormal corporate structure leading to enormous debt that hidden from the balance sheet when the asset is so much higher on company level than group level? To further illustrate, the total assets of company are 1.7 billion MYR (1.6 billion MYR for Investments in subsidiary) and total assets of company are 360 million MYR (0 for investments in subsidary). Both have comparable amounts in investment in associates.

The latest results can be found here:
http://info.sgx.com/webcoranncatth.nsf/V...400317CD1/$file/SALGroup.Results.Announcement.Q1FY2012.pdf?openelement

[D123]

One question on Silverlake that hopefully fellow buddies can share some insight. The company has much higher NAV and asset value than the group balance sheet. Yet the liabilities of the company is much lower than the group in the recent result release. I wonder how is that possible as usually the group has to have more than 51% control over the company and have to fully consolidate the business. Unless at group level the assets are net off with the subsidiaries under the group level and only shows the net asset level.

Is this a red flag of abnormal corporate structure leading to enormous debt that hidden from the balance sheet when the asset is so much higher on company level than group level? To further illustrate, the total assets of company are 1.7 billion MYR (1.6 billion MYR for Investments in subsidiary) and total assets of company are 360 million MYR (0 for investments in subsidary). Both have comparable amounts in investment in associates.

The latest results can be found here:
http://info.sgx.com/webcoranncatth.nsf/V...400317CD1/$file/SALGroup.Results.Announcement.Q1FY2012.pdf?openelement

Hi,

Let me just butt in here before the accounting pros step in.
You should note that the seeming incongruity in balance sheet figures between group and company accounts is caused by the company's adoption of "pooling-of-interest" method for consolidated figures.

The company acquired their Silverlake subsidiaries in 2006 by issuing shares and you can see the change in 2005 balance sheet figures, before and after the acquisition, from their 2006 and 2005 annual reports.

For your convenience, they can be found at these links:
AR 2006: http://www.silverlakeaxis.com/2nd/images...s_AR06.pdf
AR 2005: http://www.silverlakeaxis.com/2nd/images...s_AR05.pdf

So suffice to say, the "abnormal" figures are not due to fraud, and I think it's safe to say that you can stick to using the group balance sheet figures.

[mrEngineer]

Hi,

Let me just butt in here before the accounting pros step in.
You should note that the seeming incongruity in balance sheet figures between group and company accounts is caused by the company's adoption of "pooling-of-interest" method for consolidated figures.

The company acquired their Silverlake subsidiaries in 2006 by issuing shares and you can see the change in 2005 balance sheet figures, before and after the acquisition, from their 2006 and 2005 annual reports.

For your convenience, they can be found at these links:
AR 2006: http://www.silverlakeaxis.com/2nd/images...s_AR06.pdf
AR 2005: http://www.silverlakeaxis.com/2nd/images...s_AR05.pdf

So suffice to say, the "abnormal" figures are not due to fraud, and I think it's safe to say that you can stick to using the group balance sheet figures.

Hi D123,

Thanks for sharing the timing when Silverlake co take on the subsidaries that lead to such abrnomal figures. Basically, I gained the understanding that the 2 subsidaries (SAACIS & SHSB) requires quite a significant amount of shareholder loans which can be somewhat worrying if you think about the ROA. Especially so when the description of the 2 subsidaries principal activities are the main business of Silverlake.

As I was advised by my ex-auditor friend, he told me that the accounting treatment for this abnormality is as follows.

Holding company (likely SAACIS as incorporated in Bermuda)
Dr Investment in Subsidaries
Cr Cash

Subsidary (likely SHSB)
Dr Cash
Cr Share Capital

At Group Level elimination
Dr Share Capital
Cr Investment in Subsidaries.

I have no problem with the accounting treatment and do not think there is any fraud in this. My question is more on that if we use the group accounts to perform total asset ROA or asset turnover analysis, it may largely underestimate the impact of the assets. This may make Silverlake unknowingly attractive to other companies which props up the ROE as well.

If we think deeper, this may mean the company would require either large CAPEX or high working capital to sustain its business model which may be worrisome when the availability of funds are limited or dilution from placement or rights issue may easily take place (at the current high price and high p/e ratio).

However, by studying this corporate structure, it may be possible to completely eliminate the impact of shareholder loans in the company account if there is another holding company (3 levels) entity which can allow partial consolidation elimination. Can anyone help to verify or give some inputs on this?

All comments will be welcomed!

[D123]

Hmm, I'm not sure about the accounting entries and the high capex.

Here's what I understand from the company's past transactions.
In 2005 and 2010, the company made major acquisitions through the issuance of shares. In both cases, no cash was spent and the acquisitions were accounted for using "pooling-of-interests" methods.

The new consolidated accounts
The thing about the "pooling-of-interests" method is that it assumes the companies have been historically been operating together as one, and their assets and liabilities are simply added up to form the consolidated accounts.

In the new consolidated entity's equity account however, the "share capital" and "share premium" line items cannot be just added up simply. This is because most likely both companies have different figures of par value and premia for their shares, and the consolidated accounts need to be presented as if only one company has existed all the while.

Therefore, with the assumption that the consolidated entity has been operating as one all the time, the share capital will take the form of the parent company (usually the acquirer). The new issued shares will be accounted for as if they have existed before. Here's a working example.

Share capital of Acquirer: $10,000 (10000 shares at $1 par each)
Share capital of Acquiree: $2,000 (637 shares of $3.14 par each)

If we assume 10,000 shares of the acquirer were issued for the acquisition,

Share capital of new consolidated entity: $20,000 (20,000 shares at $1 par each)

But since no cash was actually injected into the new consolidated entity upon issuance of the new shares for the acquisition, the equity account will be adjusted for using a "merger deficit/reserve" line item to balance out the increase under "share capital". In this case,

Merger deficit = $10,000 + $2,000 - $20,000 = -$8,000

Other line items in the equity account are also added up together so that at the end of the day, the net asset account of the new consolidated entity's balance sheet balances with its new consolidated assets and liabilities.

The new parent company account
As for the parent company, its accounts also need to be adjusted to reflect the increase in shares issued. In Silverlake Axis's case, the reason why the net assets are substantially higher is because the company is forced to put a price on the value of the shares issued. Remember, when the acquisition was made, no cash changed hands so nobody can say what the true book value of the acquisition was.

Nevertheless, accounting rules dictate that a figure be placed on it. I'm not 100 percent certain how they place a value on the new shares issued, but I suspect that it is derived by valuing the issued shares at their market prices, at the time when they were issued. Take for example the case of the Silverlake Axis's 2010 acquisition. At the time of the conclusion of the acquisition and issuance of shares, the share price was about S$0.34 per share.

No. of shares issued: 1.025B
Market price of 1 share: S$0.34
Market value of shares issued: S$0.34 X 1.025B = S$348.5M or RM820M

Therefore, this RM820M will be recorded in asset account through "investment in subsidiaries" and balanced through the "share capital" (RM70M) and "share premium" (RM750M) lines.

"Pooling-of-interest" method vs Purchase method
"Pooling-of-interest" method results in lower reported net assets and higher reported earnings. This is because firstly, no goodwill is recorded on the balance sheet of the new consolidated entity, to account for the difference between the market value of the shares issued (Market price paid) and the net asset value of the acquired company (book value of net assets gained). Secondly, since there is no goodwill, there will not be any impairment or amortization of goodwill that can bring down your reported earnings on the income statement.

This is the "advantage" of using the "pooling-of-interest" method and why it was popular until it was disallowed. Yes, as far as I know, the purchase method is the only method now allowed for accounting of acquisitions and mergers, even if there is only issuance of shares and no cash is exchanged. This rule was supposedly implemented in 2005 or 2006, so I'm unsure why Silverlake Axis was allowed to use "pooling-of-interest" and frankly, I'm a bit lazy to dig out the reasons now

Silverlake Axis's amazing ROE
As far as I know, Silverlake Axis's high returns on equity are legitimate. Well, that's as far as you believe the reported net earnings represent the true owner's earnings of the company. In reality, owner's earnings are likely significantly lower than the reported earnings because (a) changes in working capital are not accounted for and (b) money spent on acquisitions are not accounted for. Here, I refer not to the share dilution effects of the all-share acquisitions, but rather, the money they spent on buying stakes in associates, which are recorded under "investments in associates". And Silverlake has spent quite a bit on associates since listing (about RM70M cash). The dilution of shareholders is another matter altogether.

Other than that, it shouldn't be surprising that the company has high return ratios since it is a software company. Capital expenditure is usually only for labour (programming skills) and computers.

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Disclaimer: I'm not a professional accountant. You should use these comments as a starting point for your self-discovery.

[shanrui_91]

I have done a partial write-up on Silverlake Axis and here are the key points:

High cash generation ability

Extreme stickiness after implementation, usually around 15 years

Licensing of software has a 90% profit margin.

It's recurring income "Maintenance and Enhancement" will continue for as long as banks continue using the software. The industry standard is 15-22% of the initial licensing fee. This segment has a profit margin of 65%.

Strong entrenched position in South-East Asia, controlling 50% of retail transactions.

M&A and consolidation of banks will help to bring new clients and business for Silverlake. Expansion of branch will also bring about extra revenue in licensing of SIBS

Financial statement - http://sgyounginvestor.blogspot.com/2012...rlake.html
Core Banking System Industry - http://sgyounginvestor.blogspot.com/2012...nding.html
SIBS - http://sgyounginvestor.blogspot.com/2012...ce-of.html

[mrEngineer]

I am surprised that you found out so much information on silverlake especially on their customers and types of system they employ or industrial knowledge on maintanence contracts for differing banks. May I know where did you get such detailed information from? IPO prospectus? Analyst reports?