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Amazing growth

Author: Amazinggrowth   |   Latest post: Sat, 16 Mar 2019, 6:13 PM

 

Is this a no-brainer investment? Free cash flow yield 15%

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The problem with a No-Brainer Investment (NBI) is that most people won’t agree with you. That is also the reason why it is a No-Brainer in the first place. You must be comfortable and confident about it. 

A NBI is one which provides you with a cash yield of double, triple, or more the cash you can get from a bank fixed deposit interest, in a consistent manner. Kcchongnz

 

The screenshot below shows the latest cash flows statement for Opensys, an undervalued market leader with high ROE that is off the radar screen of most investors. Appendix 1 is the background of Opensys.

 

FCF is whatever cash is left after all operating expenses, including capital expenses for growth, like buying new plant and machineries. FCF is like the end all goal of companies. The point is to do so well that you make so much money that even after all the checks written to expand the business you still have a lot of cash. With this FCF a company can pay out dividend consistently, buy back its shares when they are selling cheap, pare down loans, or invest in other profitable ventures, all done without assuming more debts, or issuing more shares.

Thanks to kcchongnz, I had look past PE ratio. Appendix 2 shows the definitions and explanations of the key terms.

 

Opensys’ free cash flow and cash yield

FCF = CFFO – Net Capex

Cash flows from operations (CFFO) was RM20.9 million last year, way much higher than the net profit of RM10 million. Net capex remained the same at RM6 million.

CY = Free cash flow (FCF) / Price

FCF for Opensys surged 48% to RM14.8 million last year as compared to RM10 million in the previous year. At 33 sen, the cash yield (CY) is 15.1%.

Based on the CY of 15.1%, is Opensys a No-Brainer Investments? 

 

A CY of more than 5% investing in a stock is good as it is more than the return from the fixed deposit in banks, and it is in cash too. A CY of 10% and above would be excellent investment Kcchongnz

 
 

Appendix 1

 

OpenSys (M) Bhd is a micro-cap company with a still small but rapidly growing revenue base that is off the radar screen of most institutional investors. 

Since listed in 2004, its net profit has been on a tear while revenue more than quadrupled from RM20.3 million to RM95.4 million over 14 years. The better economies of scale, coupled with improving margins, also helped propel its return on equity (ROE) by an impressive 16 percentage points to 18%. 

Today, the company counts among its clients all major banks in the country, such as Maybank, Public Bank, Hong Leong Bank and United Overseas Bank, and insurance and telecommunications companies.

OpenSys has the largest installed base of cash recycling machines, with close to 80% market share in Malaysia and has to date installed more than 2,600 machines. Currently the total number of ATMs andCDMs in Malaysia is 17,500 units with annual growth of about 5%.

CRMs are dual-function machines that merge the cash dispensing functions of ATMs and the cash deposit functions of CDMs. Banks are benefitting from the cost- effectiveness of CRMs in areas of cost of ownership, lower cash holding and reduction in cash handling cost. These significant savings have been a major driving factor for banks to undertake major fleet replacement and consolidation, resulting in the exponential growth of CRMs. In the last five years, the total number of CRMs in the market has grown exponentially with a Compound Annual Growth Rate (CAGR) of close to 40 percent.

The emerging and evolving technologies in the marketplace will fuel new possibilities for OpenSys. The versatility of CRMs will see the adoption of digital technologies and the rise of new value-added services using new digital methods of authentication and service fulfilment such as biometrics, contactless and cardless technologies, QR codes and complementary mobile apps.

OpenSys has been working closely with the banks to incorporate new technologies and services. This opens up tremendous new possibilities in banking services.
 
 
 

Appendix 2

Move over Earnings, make way for Cash

Most investors use, if they ever use at all, the price-to-earnings ratio (P/E) to measure the value of a company. Even almost all investment bankers and analysts do the same. By dividing the market price by earnings, you can get an easy-to-understand measure of a firm's value and a simple way to compare different companies to each other.  Flip the ratio over, you get E/P, or what is termed earnings yield. This you can use to compare with the return of alternative investments such as bank interest rate.

But there are hell lots of problems with the “E”, the accounting earnings. As you all know, accountants are some of the most creative people on earth. This “E” can mean anything. The link below explains some of the problems with this “E”, and the associated P/E ratio.

What is Free Cash Flow Yield or Cash Yield?

Like interest rate, cash yield (CY) for investing in a stock is simply

CY = Free cash flow (FCF) / Price,

Price is the market capitalization (MC) of a company, P = share price * no. of shares outstanding

A CY of more than 5% investing in a stock is good as it is more than the return from the fixed deposit in banks, and it is in cash too. A CY of 10% and above would be excellent investment.

Free cash flow (FCF) is what is left from CFFO after spending capital expenses (Capex) for maintaining the ongoing business, or expenses for growth of the ordinary business such as building new or upgrading the production lines, open up more similar shops for business etc.

FCF = CFFO – Net Capex

FCF is whatever cash is left after all operating expenses, including capital expenses for growth, like buying new plant and machineries. FCF is like the end all goal of companies. The point is to do so well that you make so much money that even after all the checks written to expand the business you still have a lot of cash. With this FCF a company can pay out dividend consistently, buy back its shares when they are selling cheap, pare down loans, or invest in other profitable ventures, all done without assuming more debts, or issuing more shares

 

Based on CY, we could generally conclude that high CY companies, i.e. buying companies cheap in term of cash return, is a No-Brain Investment (NBI).

 

Source

https://klse.i3investor.com/m/blog/kcchongnz/76694.jsp

http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=203830&name=EA_FR_ATTACHMENTS

http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=89759&name=EA_GA_ATTACHMENTS

https://klse.i3investor.com/m/blog/Amazinggrowth/193718.jsp

 

Disclaimer: The article above does not represent a recommendation to buy or sell.

 

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Labels: OPENSYS

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Chart Stock Name Last Change Volume 
OPENSYS 0.335 0.00 (0.00%) 48,700 

  Amazinggrowth likes this.
 
3iii Yes. You are on the right tract in your investing approach. Learn the right approach from KC.
09/03/2019 11:52 PM
Siew Jian Bin Then I will buy more and keep!
10/03/2019 6:46 AM
(2.6m shares buyback April ) Philip The questions that I usually ask of microcaps is what is its growth potential. First I look at the size of the CDM, ATM, CRM total market. How big is it in Malaysia. How easy is it to expand regionally and sell security sensitive ATM machines to Philippines, Indonesia etc? Then I look at the market size of OPENSYS, which is as you say 80% of the Malaysia market. Which is stagnating at 100 million a year since 2016? Including replacement and upgrading etc OPENSYS has been doing 100 million for the last 3 years. The question I ask is what is the life cycle of the machines? 8-10 years? What is the growth of bank branches and cash machines everywhere? With the introduction of digital payment transfers and payment via smartphone, will ATM survive the latest disruption coming from digitalisation of payments?

In my opinion, OPENSYS will never expand regionally. They license their technologies from Oki Japan, which already have other distributors in other countries.

OPENSYS only growth trigger now is to get Banks to revamp old systems to CRM machines, recycling cash automatically. If you go from 80% market share to 100% market share, you only increase revenue growth to 120 million a year. I think OPENSYS giving out dividends was a big mistake. They should have wisely used their retained earnings to find other growth triggers and organic growth, considering their close relationship with the banks.

As it is, if you believe as I do that OPENSYS growth opportunities are limited and won't have anymore spectacular growth ( 80% market share is not always a good thing), then the question to ask is if 3.79% dividend a year and a stagnating share price at around 0.36 cents since 2016 is worth putting money in for you?
10/03/2019 7:25 AM
(2.6m shares buyback April ) Philip With an annual growth rate of 5%, a total market size of 17500 units, install base of 2500 machines ( if ask your past promotions of OPENSYS), the long term prospects of OPENSYS are pretty much set in stone.

OPENSYS is an average company selling for a fair price.
10/03/2019 7:33 AM
Fabien Extraordinaire Can have a look at Hong leong industries.
10/03/2019 10:44 AM
Amazinggrowth Philip,

I don’t mind buying a company with high ROE of 18% and FCF yield of 15%, even if it is an “average” company, by your definition.

Better still, I’m paying less than 7x free cash flow for THE market leader with blue chip clients, with net cash position, with 3.79% dividend yield, with undemanding valuations, and exciting growth prospects.

Why exciting growth prospects? In the last five years, the total number of CRMs in the market has grown exponentially with a Compound Annual Growth Rate of close to 40 percent. Is this expected to continue? Yes. Because banks will continue to cut costs. Banks are benefitting from the cost- effectiveness of CRMs in areas of cost of ownership, lower cash holding and reduction in cash handling cost. These significant savings have been a major driving factor for banks to undertake major fleet replacement and consolidation, resulting in the exponential growth of CRMs.

What is the total market size? The total number of ATMs and CDMs in Malaysia is 17500 units with annual growth of about 5%. Opensys’ installed base of CRM (only) is 2600 units with close to 80% market share. Therefore, total CRMs in Malaysia is 3250 as compared to 17500 ATMs and CDMs to be replaced sooner or later.

Assume only 60% machines are CRMs in the future, the growth potential is more than 3 times (10500 units as compared to 3250 today).
10/03/2019 11:51 AM
stockraider GOOD ANALYSIS...A BIRD IN MY HAND IS BETTER THAN 2 IN THE BUSH MAH..!!

IF U GET GOOD CASHFLOW YIELD WHY WASTE TIME SPECULATING & CHASING UNCERTAIN GROWTH LEH ??

Posted by Amazinggrowth > Mar 10, 2019 11:51 AM | Report Abuse

Philip,

I don’t mind buying a company with high ROE of 18% and FCF yield of 15%, even if it is an “average” company, by your definition.

Better still, I’m paying less than 7x free cash flow for THE market leader with blue chip clients, with net cash position, with 3.79% dividend yield, with undemanding valuations, and exciting growth prospects.

Why exciting growth prospects? In the last five years, the total number of CRMs in the market has grown exponentially with a Compound Annual Growth Rate of close to 40 percent. Is this expected to continue? Yes. Because banks will continue to cut costs. Banks are benefitting from the cost- effectiveness of CRMs in areas of cost of ownership, lower cash holding and reduction in cash handling cost. These significant savings have been a major driving factor for banks to undertake major fleet replacement and consolidation, resulting in the exponential growth of CRMs.

What is the total market size? The total number of ATMs and CDMs in Malaysia is 17500 units with annual growth of about 5%. Opensys’ installed base of CRM (only) is 2600 units with close to 80% market share. Therefore, total CRMs in Malaysia is 3250 as compared to 17500 ATMs and CDMs to be replaced sooner or later.

Assume only 60% machines are CRMs in the future, the growth potential is more than 3 times (10500 units as compared to 3250 today).
10/03/2019 12:11 PM
(2.6m shares buyback April ) Philip You growth has to be spread between 8-10 years as the existing is still usable(and no requirement to replace new but maintain and run) and banks are moving more towards online transactions instead of via machine. My family and I pay all our bills, loans and transfers online these days as it is much more convenient than paying at the machine. I believe this trend is something that will grow further and not lessen as smartphones and internet get cheaper and cheaper.

CDM machines were brilliant as they were the disruptors of the day when they replaced the bank tellers job.

I firmly believe that the internet, smartphone app and digitisation of payments will further disrupt this chain of investment in the long term 5-10 years from now, reducing the need for high tech CDM, CRM machines, and maintaining existing machines only.

I may be wrong, and I dearly hope you are right as I have no position into OPENSYS. But I do think the best days are behind it. I wouldn't be surprised in the age of 5G payment machines going the way of the physical payphone.

Good luck in your investment. You know the environment better than my cursory glance.
10/03/2019 12:12 PM
(2.6m shares buyback April ) Philip But looking bigger picture at the 5 year results of its technology owner OKI electric industries (Japan) shows a stagnating and slowing growth over the past 5 years, share price also stagnating and going down slowly. Even in their annual report, oki find that the internet adoption and the slowing down of their ATM machine usage internationally is quite worrying.

It shares a similar correlation to OPENSYS local dynamics.
10/03/2019 12:17 PM
stockraider AGAIN WHY HARPING ON GROWTH WHEN YOUR CASHFLOW YIELD IS 17% PA LEH ??

IN ADDITION U GET DIV YILELD 5% PA TO COVER UR CONSUMPTION EXPENSES AND DOUBLE UR CAPITAL EVERY 5 YRS MAH.....!!


Posted by (S = Qr) Philip > Mar 10, 2019 12:12 PM | Report Abuse

You growth has to be spread between 8-10 years as the existing is still usable(and no requirement to replace new but maintain and run) and banks are moving more towards online transactions instead of via machine. My family and I pay all our bills, loans and transfers online these days as it is much more convenient than paying at the machine. I believe this trend is something that will grow further and not lessen as smartphones and internet get cheaper and cheaper.

CDM machines were brilliant as they were the disruptors of the day when they replaced the bank tellers job.

I firmly believe that the internet, smartphone app and digitisation of payments will further disrupt this chain of investment in the long term 5-10 years from now, reducing the need for high tech CDM, CRM machines, and maintaining existing machines only.

I may be wrong, and I dearly hope you are right as I have no position into OPENSYS. But I do think the best days are behind it. I wouldn't be surprised in the age of 5G payment machines going the way of the physical payphone.

Good luck in your investment. You know the environment better than my cursory glance.


(S = Qr) Philip
865 posts
Posted by (S = Qr) Philip > Mar 10, 2019 12:17 PM | Report Abuse

But looking bigger picture at the 5 year results of its technology owner OKI electric industries (Japan) shows a stagnating and slowing growth over the past 5 years, share price also stagnating and going down slowly. Even in their annual report, oki find that the internet adoption and the slowing down of their ATM machine usage internationally is quite worrying.

It shares a similar correlation to OPENSYS local dynamics.

Page 1
10/03/2019 12:32 PM
Amazinggrowth Philip,

Do you understand the business models of Opensys? You will appreciate more if you do.

OpenSys has four business revenue models, namely
(i) outright sales,
(ii) software services,
(iii) outsourcing services and
(iv) maintenance services.

In outright sales, our CRMs and cheque deposit machines are sold directly to the financial institutions.

In software services, we provide software development services to our customers when they need modification to their application software due to changes in their business or regulatory requirements.

In outsourcing services, we provide bill payment kiosks to utility, insurance and telecommunication companies over a contract period of 3-5 years. The customers pay a rental for the machines plus a click charge for each transaction.

In maintenance services, the banks pay us an annual maintenance fee of 10-12 percent based on the selling price of the machines that we sold to them. In return, we service and repair the machines to ensure high availability and optimum uptime.

(Sourced from annual report)


Yes, you are right. Opensys has been doing RM100 million sales for the last 3 years. and roughly half is from CRM outright sales. But you miss the crux of the matter. Maintenance profit!

1 CRM costs roughly RM70,000. Therefore, they sold ~700 machines per year for last 3 years. Maintenance fee is recurring annually after 2-3 years free warranty period. Lifespan of machines is 8-10 years. Total profit for 2600 CRMs? Recurring for the next 5-7 years? You do the math. The market is big enough to multiply profits several times if they continue to win more market share.

“Over the last 4 years, the penetration rate of CRMs has increased to approximately 20 percent of the total installed base, largely due to the efforts of OpenSys. If the banks in Malaysia start to install CRMs at their new branches, or replace their older ATMs and CDMs with CRMs, OpenSys is in a prime position to profit from it. Considering that we have an excellent track record, we are optimistic that we will continue to win more market share than our competition.” Opensys annual report


Source

Business models
http://disclosure.bursamalaysia.com/FileAccess/apbursaweb/download?id=185709&name=EA_DS_ATTACHMENTS

CRM cost
http://www.theedgemarkets.com/article/opensys-roll-out-rm36m-worth-oki-cash-recycling-atms-3q
10/03/2019 12:32 PM
Choivo Capital I was looking at this.

Very interesting Co and great management. Only thing is its not that cheap.

Still....
10/03/2019 12:34 PM
stockraider LETS ANALYSE OPENSYS ;

OpenSys has four business revenue models, namely
(i) outright sales, NEUTRAL GROWTH PROSPECT
(ii) software services, GOOD PROSPECT STILL GROWING
(iii) outsourcing services CHEQUE PROCESSING FALLING VOLUME
(iv) maintenance services. GOOD PROSPECT DUE TO HUGE CRM MACHINE

THE CHALLENGES POSE;

1. CHEQUE PROCESSING OUTSOURCING BUSINESS FALLING INCOME DUE TO LESS VOLUME OF CHEQUE USE LOH....!!

2. OUTRIGHT SALES OF CRM MACHINE LOWER GROWTH RATE AS THE VOLUME GROWTH TAPER DOWN DUE TO MATURITY OF THE MARKET AND COMPETITOR LIKE NCR AND HITACHI START COMING OUT WITH THEIR OWN CRM MACHINE. THIS MEAN MKT INTENSIFY LOH....!!
BUT OKI UP THEIR ACT....THEIR MACHINE CAN EVEN PROCESS RM 1 NOTES LOH......!!

3. SOFTWARE AND MAINTENANCE SERVICES SHOULD BE THEIR CORE BASE BUSINESS BUT THERE MAKE UP FOR DECLINING SALES OF CHEQUE PROCESSING AND LOWER RATE OF CRM SALES ??
RAIDER SEE THE ANS IS YES.....BUT MKT SAY UNCERTAIN....THATS WHY PE LESS THAN 10X LOH....!

But overall...Raider see it is a worthwhile investment in opensys the core software and maintenance should give a large core base income loh......!!
10/03/2019 1:19 PM
(2.6m shares buyback April ) Philip Do you have access to the cash flow and cash assets as minority shareholder?
No you don't. All you have access to is dividends and share price increase.

I suggest you pay attention to that very important fact, and keep that in your mind in your valuation of any investment. There is a reason why they call it a value trap. Same with INSAS. Same with Parkson. Same with xinquan.

You cannot use one single metric to evaluate a company.

If you could and investing was easy, I would buy Parkson, with a market cap of 267 million but with net assets of 3.6 billion. And cash of 1.18 billion.


>>>>>>
AGAIN WHY HARPING ON GROWTH WHEN YOUR CASHFLOW YIELD IS 17% PA LEH ??
10/03/2019 1:57 PM
(2.6m shares buyback April ) Philip And sell it for parts.
10/03/2019 2:00 PM
stockraider Sohai comment loh.!....already says opensys paying 5% pa yield mah....What QL div yield less than 1% pa ?....if u r so concern of access of cash u should be very concern of QL instead mah....!!

Posted by (S = Qr) Philip > Mar 10, 2019 01:57 PM | Report Abuse

Do you have access to the cash flow and cash assets as minority shareholder?
No you don't. All you have access to is dividends and share price increase.

I suggest you pay attention to that very important fact, and keep that in your mind in your valuation of any investment. There is a reason why they call it a value trap. Same with INSAS. Same with Parkson. Same with xinquan.

You cannot use one single metric to evaluate a company.

If you could and investing was easy, I would buy Parkson, with a market cap of 267 million but with net assets of 3.6 billion. And cash of 1.18 billion.


>>>>>>
AGAIN WHY HARPING ON GROWTH WHEN YOUR CASHFLOW YIELD IS 17% PA LEH ??
10/03/2019 2:01 PM
beso as i said earlier, opensys current price is fully value nothing more nothing less, mr. market won't judge wrongly but you will, be realistic if it has very good prospect, market would have been trading at 20 to 25 times already.
10/03/2019 2:44 PM
stockraider In order to profit from Mr mkt u need to buy cheap & sell expensive mah...!!

That means u go for undervalue stock like opensys Pe 10x and u sell overvalue stock QL 50x PE loh...!!

Posted by beso > Mar 10, 2019 02:44 PM | Report Abuse

as i said earlier, opensys current price is fully value nothing more nothing less, mr. market won't judge wrongly but you will, be realistic if it has very good prospect, market would have been trading at 20 to 25 times already.
10/03/2019 3:12 PM
Amazinggrowth Beso, your comment does not add any value to the discussion. If you don’t know what you are talking about, don’t comment. State your points and arguments rather than just say “fully value nothing more or less”. This is not kindergarten. Do you homework and comment with real substance!
10/03/2019 3:45 PM
Amazinggrowth okdoke,
E-wallet is still in trial period. imho, it will take at least another 20 years for e-wallet to reach the tipping point because majority of us prefer to use cash. I believe CDM/ATM will coexist with mobile payments in the future.

E-commerce is a good benchmark. The industry started in 1998 in Malaysia. After 20 years, the e-commerce penetration rate in Malaysia is still less than 6% of the total retail market.

https://e27.co/key-challenges-opportunities-malaysias-e-commerce-scene-20181022/


Posted by okdoke > Feb 17, 2019 07:54 AM | Report Abuse

any opinion on e-wallet etc which will eliminate the need of ATM/CDM? thanks

————-

ChongHH,
At 9.7x PE, the market assumed that Opensys will never grow again. Thanks to the misunderstanding about the threat of cashless payments, valuations are cheap. I think there is a lot of opportunity to grow. Currently, only 20% of bank machines are CRMs. The market share had tripled from only 6% in 2015.


Posted by ChongHH > Feb 17, 2019 11:29 AM | Report Abuse

Is there a possibility the market is valuing OpenSys at 9.7x PE because the market saw a growth rate stop 5 - 10 years later?

Source
https://klse.i3investor.com/m/blog/Amazinggrowth/193718.jsp
10/03/2019 3:58 PM


 

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