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HLBank Research Highlights

Author: HLInvest   |   Latest post: Tue, 22 Oct 2019, 9:15 AM

 

Opensys (M) Bhd - Positive Outlook Amid Undemanding Valuations and Decent Dividend Yield

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We like OpenSys due to its dominant position (~80% market share) in the fast growing CRMs (grew at 40% CAGR in the last 5 years) market. Despite the threat of migration to cashless society, OpenSys remains confident of its prospects as there is a huge latent demand for CRMs due to replacement cycles of banks’ ATMs and CDMs. Moreover, OpenSys believes that the migration of cash to digital payments will be a gradual process (an evolution rather than a revolution). OpenSys 16% decline from 52W high of RM0.375 has made it an attractive value proposition, given the company’s resilient outlook, improving margin due to the stronger RM against foreign currencies. cheap valuations at 9.6x trailing P/E and 1.73x P/B (64% and 24% lower than its peers), strong net cash of 6.3sen/share (ex-cash P/E of 7.6x) and decent DY of 3.2%. A decisive triangle breakout may retest the RM0.36-0.385 territories.

Brief profile. OpenSys has four business revenue models, namely (i) outright sales – Cash recycling machines (CRMs) and cheque deposit machines (CDMs) are sold directly to the financial institutions, (ii) software services - provides software development services to customers when they need modification to their application software due to changes in their business or regulatory requirements, (iii) outsourcing services - provides bill payment kiosks to utility, insurance and telecommunication companies over a contract period of 3-5 years, where customers pay a rental for the machines plus a click charge for each transaction and (iv) maintenance services - the banks pay an annual maintenance fee of 10-12% based on the selling price of the machines that sold to them for after sales services. Overall, most of its customers are blue chip companies, where the collection risk for its trade receivables Is Very Low.

Dominant position in CRMs and CDMs. On 25 Sep 2018, OpenSys announced that it has rolled out more than 500 units of OKI Cash Recycling ATMs valued at ~RM36m at Public Bank, Bank Islam, RHB Bank and other major banks in 3Q18. OpenSys has to date installed more than 2600 machines, with close to 80% market share in Malaysia. The latest development further cements its leadership position in the market and likely to improve further upcoming quarterly results. Besides, OpenSys is the leading supplier of cheque-deposit machines (CDMs) and image-based cheque processing systems in Malaysia, commanding a hefty ~85% of the market in local self-service machines.

More migration to CRMs by banks due to substantial cost savings. CRMs are dual-function machines that accept cash from depositors and dispense them to withdrawers, so cash is essentially ‘recycled’. Banks are benefitting from the cost effectiveness of CRMs in areas of cost of ownership, lower cash holding and reduction in cash handling cost. Banks can typically save between 25-30% in both capital expenditure and annual operational costs, which has been 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 at ~40% CAGR. Overall, 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.

Prime beneficiary of replacement of ATMs by banks. Currently, the total number of ATMs and CDMs in Malaysia is approximately 17,500 units with an annual growth rate of about 5%. Over the last 4 years, the penetration rate of CRMs has increased to approximately 20% 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.

Solid strategic partner. OpenSys is poised to continue its leadership position in CRMs by continuing to partner with OKI Japan to work closely with the banks in delivering solutions that make a difference. Oki Electric Industry Co (OKI) is a large multinational based in Tokyo with presence across the globe. OKI is Japan's pioneering manufacturer of telecommunications equipment, founded in 1881 and is the world's first company to have developed Cash Recycling ATMs in 1982. OKI has more than 30 years of experience and technologies to have developed and manufactured seven generations of Cash Recycling ATMs for financial markets and four models of Cash Recycling ATMs for retail markets. OKI has major market share in major countries such as Japan, China, Korea, Malaysia and Taiwan.

Outlook remains positive despite the threat of cashless society. With regard to claims that Bank Negara Malaysia’s various initiatives and long-term trend to migrate to a cashless society will render its business model unsustainable, OpenSys countered that cash is still king and legal tender in many countries. According to IMF (June 2017) report, globally, 85% of all payments are still made in cash. Similarly, in Malaysia, most people have a relatively high dependence on cash for payment transactions. In 2016, cash in circulation (CIC) grew 11.5% YoY to RM85.46bn. Meanwhile, CIC per GDP, a measure of a country’s reliance on cash for transactions, expanded from 6.62% to 6.95%.

Poised for a bullish triangle breakout. After sliding 26.7% from 52W high of RM0.375 (4 Oct) to a low of RM0.275 (3 Jan 2018), OpenSys share price has staged a 14.5% technical rebound to end at RM0.315 last Friday. Based on daily chart, the stock may be anticipating a triangle breakout, while the weekly chart shows a potential downtrend reversal after share prices closed above multiple key SMAs and supported by upticks in technical indicators. Valuations also remain undemanding as it is trading at 9.6x trailing P/E and 1.73x P/B (64% and 24% lower than its peers), strong net cash of 6.3sen/share (ex-cash P/E of 7.6x) and decent DY of 3.2%. our pre-tax margin and is due to the stronger ringgit against foreign currencies.

Hence, a strong breakout above RM0.325 (downtrend line) will push share prices towards RM0.34 (50% FR) and RM0.36 (61.8% FR) before reaching our LT objective at RM0.385 (76.4% FR). Key supports are situated at RM0.30 and RM0.29 (18 Jan low). Cut Loss at RM0.285.

Source: Hong Leong Investment Bank Research - 11 Feb 2019

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