Thursday, March 10, 2011

Opensys - attractive but are they up to it?

Today I am going to introduce a sub RM20 million market capitalised company. Usually, these types of companies are not worth looking at. However, sometimes we can find a gem among worthless stones. I found one which looks rather interesting. The company is Opensys.

In studying the financials for Opensys, one should not just look at the revenue and PAT, but instead look through the Balance Sheet and Cashflow Statement. This is because income statement is much easier to dress in terms of financial presentation as compared to cashflow statement and balance sheet.

Below are the summary on the important numbers for the company.

Based on the numbers, we can summarize as follows:
- its revenue and PAT have not been showing eye-catching growth between 2003 to 2010;
- the company faced high gearing problem during 2005 to 2008;
- development expenditure was way too high as compared to its revenue between 2005 to 2008;
- from 2007, its debt was reduced substantially from RM33 million to RM11.5 million in 2010. I believe the gearing will reduce further in upcoming years looking at the trend. So are the development expenditure;
- in the initial years it was facing negative free cash flow (cashflow from operations – capital expenditure). Its cashflow however improved to much healthier note in the last 3 years in operations;
- if the trend continues, it will show much healthier balance sheet and dividend payment capabilities;
- with the reduction in PP&E, development expenditure and borrowings, in the long run the Earnings before tax will naturally improve as well.

Why are the numbers as such?
- Can see that the company is trying hard to register profit numbers each and every year which is probably why they have capitalised quite a bit of the capital purchase and expenses between 2005 to 2007 (Note that by capitalising your expenses, it will be shown as asset rather than a cost shown in the income statement);
- It was facing high gearing problem between 2005 to 2008, hence was seriously short of funds. Their total debt to cash was between 10x to 15x during those period;
- Business nevertheless improved substantially, can witnessed from the cashflow and where they reduced the net debt. Its reduction in debt are paid off from free positive cashflow;

With the weak balance sheet in the earlier years between 2005 to 2007, you will see that its PAT has not improved even though balance sheet became healthier. (Note that they did not raise any equity fund except for the IPO in 2004)

One thing to note however, at RM0.09 per share, its market capitalisation is at RM18.99 million which is equivalent to 1.93x of its free cashflow generating capability for FY2010.

While the financial numbers are very attractive - whether it is an investible company, one should look at their business i.e. are their earnings sustainable. If the fundamental of its business is strong as seen in the last 3 years, the share price then should improve from the current level.

Business wise, they offer services to two main sector i.e. banking and utility. It claims that it has an 80% market share in the back-end cheque processing business from the banks. It is worthwhile to note that Bank Negara imposed a faster cheque processing turnaround time since July 2009. And Opensys has gotten the bulk of the business from the banks. Another of its competitor, Symphony House, a Business Process Outsourcing house has a different proposition to Opensys. Symphony House (under Azman Yahya) does physical processing on the cheques while Opensys computerise those processes.

As for the utility sector, Opensys provides the kiosk payment solution for some of the larger utility companies such as Celcom, Maxis and TM.

Based on that, it does have a serious, sustainable business to go with. However, as the company is small, most investors might not have interest in such small company. Hence, what Opensys must be able to do is to continue to do what it does best. Time will then only be its friend as fundamental will over time take over the pessimists.

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