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Amazing growth

Author: Amazinggrowth   |   Latest post: Sat, 22 Jun 2019, 11:19 PM

 

My reply to (S = Qr) Philip comment (A no-brainer investment?)

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My reply to (S = Qr) Philip comment on the following post

https://klse.i3investor.com/m/blog/Amazinggrowth/197164.jsp

 

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).

 

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

 

 

 Posted by (S = Qr) Philip > Mar 10, 2019 07:25 AM  |  Report Abuse 

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?

————————

 

Snapshot of earlier post 

 
Close 
 

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

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

 

 

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  3 people like this.
 
Amazinggrowth Thanks to Philip for the constructive comments which I always welcome. Especially from a very experienced investor.
10/03/2019 9:18 PM
Choivo Capital Did Phillip even read the fs before he comment.

Or just whack only, regardless of whether or not its in his circle of competence.
10/03/2019 10:16 PM
Amazinggrowth Haha, you have to ask him.

Please feel free to comment if you have anything substantive to say about Opensys.
10/03/2019 10:50 PM
Amazinggrowth Choivo,

Why do you think Opensys is very interesting? How do you know the management is great?

Mind to share?


Posted by Choivo Capital > Mar 10, 2019 12:34 PM | Report Abuse

I was looking at this.

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

Still....
10/03/2019 11:02 PM
Choivo Capital Management is great. Just read the management analysis you know d. Alot of what you need to know is actually in there, which is rare.

I deleted my original comment as im thinking of buying some, and its cheap enough that i don't need other people's confirmation or critique. And so, i can keep my research to myself.

Your email however, should have a copy of my original comment.

Ill drop one hint, i don't really give a damn about the revenue growth from machine sales, or the profit from that. Its important as a feeder to the moneymaker, but its not key.
10/03/2019 11:55 PM
Amazinggrowth My take on cashless society/e-wallet

I think the market is too negative on the threat of cashless payments that will reduce the need for cash in the future. The ecosystem for cashless society is still in infancy stage.

Currently, e-wallet is 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.
11/03/2019 12:04 AM
Choivo Capital Now, shhhhhhhhh.

If you actually think its a great idea and a great investment. Keep quiet about it and buy.

Good ideas are rare.
11/03/2019 12:05 AM
Amazinggrowth Choivo,

I agree with you on the MDA. Very few management can write as good as that.

Rare indeed.


Posted by Choivo Capital > Mar 10, 2019 11:55 PM | Report Abuse

Management is great. Just read the management analysis you know d. Alot of what you need to know is actually in there, which is rare.

I deleted my original comment as im thinking of buying some, and its cheap enough that i don't need other people's confirmation or critique. And so, i can keep my research to myself.

Your email however, should have a copy of my original comment.

Ill drop one hint, i don't really give a damn about the revenue growth from machine sales, or the profit from that. Its important as a feeder to the moneymaker, but its not key.
11/03/2019 12:12 AM


 

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