Silverlake Axis

[shanrui_91]

I thought that the best way to figure out if it is good deal or not for shareholders will be to look at what happen if the dilution took place or not.

   

I have used Profit Before Taxation as this is what's provided in the segmental breakdown. The problem with the old business is that when you have order book, margins are fantastic. However, when you fail to win contract and your order books run out your profit can drop significantly. From 2009 to 2011, the profitability were way poorer without Maintenance and enhancement income as the order book got depleted. If the acquisition of the recurring segment has not taken place, shareholders will have been far worse with a super lumpy business.

Mr Goh did a fair deal by getting exactly the share of contribution of the maintenance business. He is not altruistic, but by combining the licensing and maintenance together, Silverlake Axis then become an excellent business. He will also be able to fully realise the value of Silverlake Axis as a whole as compared to separate parts.

However, I still can't figure out why the 100 million placement is done. Guess only Mr Goh will know the true ans

(vested)

[Nick]

I thought that the best way to figure out if it is good deal or not for shareholders will be to look at what happen if the dilution took place or not.



I have used Profit Before Taxation as this is what's provided in the segmental breakdown. The problem with the old business is that when you have order book, margins are fantastic. However, when you fail to win contract and your order books run out your profit can drop significantly. From 2009 to 2011, the profitability were way poorer without Maintenance and enhancement income as the order book got depleted. If the acquisition of the recurring segment has not taken place, shareholders will have been far worse with a super lumpy business.

Mr Goh did a fair deal by getting exactly the share of contribution of the maintenance business. He is not altruistic, but by combining the licensing and maintenance together, Silverlake Axis then become an excellent business. He will also be able to fully realise the value of Silverlake Axis as a whole as compared to separate parts.

However, I still can't figure out why the 100 million placement is done. Guess only Mr Goh will know the true ans

(vested)

Hi Shanrui,

Thanks for the table. I do agree that the Group as a whole has been strengthened significantly with the acquisition of the licensing business in FY 2006 and the recurring maintenance arm in FY 2010. I don't think the issue is whether the acquistions were good but rather was placing out new shares to the Vendor as payment was the best method. I guess investors will find it perplexing that equity was used to finance the acquisitions considering the cost of debt was probably lower.

For instance, if the FY 2006 acquisition was financed internally with 46 million cash and 700 million debt at 7.0% interest rate, the PBT for FY 2007 would have been 83 - 49 = 34 million. Since the share float remains unchanged at 285.5 million, the EPS would have grown to 11.9 cents. Similarly, if the FY 2010 acquisition valued at 937 million was funded with 37 million internal cash and 900 million debt at 7%, the FY 2011 profit would be 132 - 49 - 63 = 20 million or 7.0 cents. In both cases, EPS was higher than the current figures. Granted, this is the other extreme to a 100% equity backed transaction so the optimal solution would probably lie in between. So I have no idea why this wasn't pursued - or there might be a good reason which I might be missing out on. Though I must admit - this is becoming very theoretical and I guess the unusual nature of the past acquisitions might have taken time to be appreciated. Eventually, SAL share price did appreciate with rising quarterly dividends and everyone benefitted. Please correct me if my assumptions are flawed.

[shanrui_91]

Hi Shanrui,

Thanks for the table. I do agree that the Group as a whole has been strengthened significantly with the acquisition of the licensing business in FY 2006 and the recurring maintenance arm in FY 2010. I guess investors will find it perplexing that equity was used to finance the acquisitions considering the cost of debt was probably lower. For instance, if the FY 2006 acquisition was financed internally with 46 million cash and 700 million debt at 7.0% interest rate, the PBT for FY 2007 would have been 83 - 49 = 34 million. Since the share float remains unchanged at 285.5 million, the EPS would have grown to 11.9 cents. Similarly, if the FY 2010 acquisition valued at 937 million was funded with 37 million internal cash and 900 million debt at 7%, the FY 2011 profit would be 132 - 49 - 63 = 20 million or 7.0 cents. In both cases, EPS was higher than the current figures. Granted, this is the other extreme to a 100% equity backed transaction so the optimal solution would probably lie in between. So I have no idea why this wasn't pursued. Though I must admit - this is becoming very theoretical and I guess the unusual nature of the past acquisitions might have taken time to be appreciated. Eventually, SAL share price did appreciate with rising quarterly dividends so there was a happy ending for everyone. Please correct me if my assumptions are flawed.

You were right about the debt part which I did not think of since essentially you could even spin off the maintenance and enhancement as a business trust.

I guess this is a matter of choice that lies with the mgmt and can show how much they do care abt minority shareholder. They can reward, take advantage or simply be fair to the shareholder. He choose to be fair without rewarding or taking advantage of shareholder given the way the deal is structured.

I am more bothered with the latest deal of placement + sale of his share. There seemed to be more negative possibilities than positive possibilities
(vested)

[Nick]

Thanks for the reply Shanrui. Always a pleasure reading your posts. Your blog post on Silverlake was top-class !

[specuvestor]

Silverlake has been hammered in the past for the lumpy business. He was "forced" to merged the business in 2010 partly from shareholders who are not going to pay reasonable valuations for the lumpy business. That was why it was done with shares.

Now that valuation are at a premium, he can start paring his stake down. Like Shanrui pointed out, he is not altrusitic. In fact a bit cunning in terms of keeping the maintainance business to himself originally. Guess enlightened self-interest work in this case but for sure he is no angel. Caveat Emptor.

[CityFarmer]

Ultimately, value investors are looking at IV, where good proxies of it are earning per share, and NAV per share.

Let's look at the NAV and NAV per share from 2005 (before any placement) to 2012 (latest FY). Earning per share was highlighted in previous posting, so i will not repeat here.

2005: NAV (S$33.2 mil) and NAV per share (11.7 cents)
2012: NAV (S$119.2 mil) and NAV per share (5.7 cents)

NAV increased by 3.6x but NAV per share reduced by more than half

Well, probably too much as devil advocate on the merit of the company.

IMO, probably the same as Nick, if no further dilution(s), the company is definitely a good bet for its future growth. It don't seem the case...

I may be wrong, since share price appreciated more than double after it was monitored...

(not vested)

[CityFarmer]

Observed that there is buying-back by SGX on this stock today, total 374 lots.

SILVERLAKE 374,000 S$ 273,020.00

http://info.sgx.com/webcoranncatth.nsf/V...800389E95/$file/Buying-InExecutedon12June2013.pdf?openelement

[momoeagle]

I offloaded all my remaining counters today

Was a good ride

[palantir]

I offloaded all my remaining counters today

Was a good ride

What happen?

[Dividend Warrior]

I offloaded all my remaining counters today

Was a good ride

What happen?

Maybe taking profits off the table?