Fundamental Investing
Identifying a stock with my selection criteria - Opensys
Before I begin, I would like to comment on kcchongnz's ECS ICT post. I have said that I believe the weaker ringgit will continue to squeeze margins and profits from the company. I may have been pre-mature to say that because a few weeks later, ECS ICT produced a stronger Q4 result and also an overall stronger FY2015 result.
I think KC may have been right. Selling lower margin products at higher volumes can produce higher profits. When I think of it, the same can be said for Padini. For the past 5 years, its' margins continue to drop slightly but it can still produce higher profits by doing more sales. I guess that is how business are being run; when margins are low, sell at higher volume.
So what does it have got to do with this stock that I will be talking about? I will explain in a bit.
Today I would like to identify a stock using my updated selection criteria that I wrote a few days ago: http://klse.i3investor.com/blogs/shinado/92723.jsp
I have previously bought Opensys in June 2014 at RM 0.345 per share. After slightly more than 3 months, I have sold it for RM0.42 per share as I believe the price went up quite fast in short period of time and also I have spotted better stocks to invest in. 5 days later, I bought into Scientex (RM7.04) and Magni-Tech (RM3.18 - pricing at that time) which proved to be a good decision. Now I'm back to review this 'old friend'.
I'm sure most are familiar with Opensys. It is a business that supply and maintain cash recycler machines (CRM) and cheque deposit machines (called ESM or Efficient Service Machines) to major banks in Malaysia. It also provide Business Processing Outsourcing (BPO) for bill payment kiosk to select utility, telecommunications & insurance businesses in Malaysia. Opensys was incorporated as a private limited company in 1995 and is a public listed company in the ACE Market since year 2004.
CRM machines are not widely available in whole of Malaysia as it is still considered 'new' to us. But I think you can find it in certain Public or Hong Leong Bank. Basically CRM machines combines the function of ATMs with Cash Deposit Machines into one. This will allow for cost reduction for banks.
Sample of a CRM machine
According to its website, Opensys commands a 85% of the market in the cheque deposit machine segment.
So how is Opensys doing for the past 5 years? Let's have a look.
Revenue, Profit, Owner's Earnings & Margins.
Opensys registered revenue of RM 72.5 million for financial year 2015. In Year 2011, it was RM 29 million, representing a 25.7% CAGR for a 5-year period.
Gross profit stands at RM 21.6 million, representing a gross margin at 29.8%. Do note that gross margin is decreasing due to higher cost of sales (weaker ringgit) but gross profits continue to increase 14% CAGR for the 5-year period.
Does the weaker ringgit hurt gross and profit margins? Yes. But it has been negated by higher sales volume, resulting in higher gross profit and net profit. Hence, my reference to what I said earlier above on ECS ICT.
Likewise, its earnings before interest and taxes (EBIT) increased in-line with gross profits for a 16.3% CAGR.
Net profit and owner's earnings continue to increase by 16.7% and 13.7% CAGR respectively.
Return of Average Equity, Return of Invested Capital, Cash Return of Invested Capital & Free Cash Flow.
For FY 2015, Opensys registered a 18.3% in ROAE, 25.1% in ROIC & 36.9% in CROIC. There are a few different ways to calculate ROIC & CROIC. Except for FY 2014, Opensys have positive and high CROIC each year for the past 5 years which is good.
For the past few months, I have been self-studying on the Magic Formula and therefore I will use Joel Greenblatt's version to calculate ROIC as an example. The calculation is as below:
ROIC = EBIT / Invested Capital
whereby, Invested Capital = Plant, Property & Equipment + Inventory + Receivables - Payables
CROIC will be calculated as:
CROIC = Free Cash Flow / Invested Capital
whereby, Free Cash Flow = Net Cash Flow from Operations - Capex
The average ROIC and CROIC for 5-year period is 18.2% and 16% respectively. Free cash flow over Revenue for the latest financial year 2015 is at 22.8%. On the average, FCF vs Revenue for Opensys is 14.5% for the past 5 years.
Opensys have gearing ratio of 0.32 or 32% of borrowings from it's equity. So debt is still considered manageable. I also noticed that its cash conversion cycle has been reduced to half of what it was in 2011, therefore confirming that its cash flow indeed has improved.
Based on the latest financial report, Opensys is sitting at RM4.14 million in cash, or 1.4 cent per share
Overall, Opensys managed to meet all of my selection criteria. So how do we value Opensys?
Valuation.
Different people have different ways of evaluating a stock. I do not use P/E ratio as a guidance, but instead I use the EV/EBIT or EBIT/EV for valuation.
For those who look at Price to Free Cash Flow ratio, this looks like a good buy. Anything below ratio of 20 is good and below 10 can be considered excellent. The EV/EBIT and EBIT/EV shows that it is not undervalued. Warren Buffett is willing to pay for a good company with Enterprise Value of 7 times its EBIT. I would say that Opensys is considered somewhere around 'fair value'.
As of FY 2015, Opensys is paying its shareholders 1 cent dividend per share. Based on current price of RM0.29 per share, that yields 3.45% which is comparable to FD rates in Malaysia. Opensys managed to pay dividends to its shareholders each and every single year since 2010.
Conclusion.
I have just bought Opensys at RM 0.29 per share. I believe the usage of CRM machines in Malaysia will continue to grow for years to come. This bodes well for Opensys, increasing its revenues and profits albeit with lower margins. Combined with its good and proven fundamentals, I think the risks are limited.
Note: This post serve as information sharing on how I can identify stocks with my selection criteria. It does not serve as a BUY/HOLD/SELL call. Please do your research beforehand as you are responsible for your own actions. Do not follow blindly as my selection criteria may not suit your taste.
Thank you.
shinado
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6 people like this. Showing 22 of 22 comments
Probability, I get the figures from Q4 report. I know FY2015 annual report is not out yet and I know Q4 report is not fully audited, but the figures should not vary by a lot.
For Free Cash Flow yield, can refer to table above. All figures for 2015 taken from Q4: http://www.bursamalaysia.com/market/listed-companies/company-announcements/5012893
All figures in RM ('000).
Revenue = 72,506
Free Cash Flow = Net Cash Flow From Operations - Capex = 17,210 - 681 = 16,538
FCF vs Revenue = 16538 / 72506 = 0.228 or 22.8%
To calculate EV, we need Market Capitalization + Total Borrowings - Cash Balance.
Market cap is calculated from price per share x number of outstanding shares.
Total Borrowings is 14,597 and Cash balance is 4,140
EV = (297892 x RM0.29 per share) + 14597 - 4140 = 96845.68
EBIT can refer to table, is 11,251.
So EV / EBIT = 96845.68 / 11251 = 8.6 (rounded up)
or EBIT / EV = 11251 / 96845.68 = 11.6% (rounded up)
It's not exactly cheap, but I am willing to pay for it.
Hope this helps. Cheers.
Posted by Probability > Mar 10, 2016 02:03 PM | Report Abuse
excellent presentation shinado...
you are really improving well.
I have not made a study by myself yet...but sure getting curious.
on the Cash yield, was is taken for TTM? Could you share the figures for TTM
and also the EV/EBIT for TTM...thanks :)
2016-03-10 14:33
Sorry, forgot to include minority interest. EV = Market Cap + Total Borrowings + Minority Interest - Cash Balance. It can be obtained in the balance sheet section. Opensys have 0 minority interest.
2016-03-10 14:37
It looks really good Shinado...care to check that if you are deriving based on the latest quarter, to exclude any sudden contribution on the Cash flow from the Net Working Capital changes. This can sometime skew the figures..
2016-03-10 14:40
Good call Probability. However, do note that historically the FCF vs Revenue has been quite high for the past few years.
2015 2014 2013 2012 2011
FCF vs Revenue 22.8% -11.0% 18.4% 16.7% 25.6%
2016-03-10 14:44
Nice sharing and a lot of new information for newbie like me. Reading this made me realize there's a lot more I need to learn.
2016-03-10 16:05
Seems like you have done your homework well, shinado.
There are actually a lot of companies like these, which is low margin but compensated by high volume of sales.
Many of them usually has to do with the tech sector - KESM, ECS ICT, to name a few.
Anyways, good presentation. Thumbs up. Hope to see more write up from you in the future.
2016-03-10 16:26
Thank you all. I am also learning just like you all because there is still alot that I do not understand. I only share what I learn.
2016-03-10 19:27
Shinado, in regards to your post above, could you pls explain below?
So EV / EBIT = 96845.68 / 11251 = 8.6 (rounded up)
or EBIT / EV = 11251 / 96845.68 = 11.6% (rounded up)
i am not very understand this part. Cheers!
2016-03-14 21:44
Hi alvin1314,
EV is Enterprise Value whereas EBIT is Earnings Before Interest and Tax. Both EV/EBIT & EBIT/EV are used to calculate a present value of a company.
EV / EBIT calculation usually return a single or double digit number, while EBIT / EV is in percentage.
Usually companies trading at EV/EBIT of 7 or less is considered undervalued, while in EBIT/EV it is 15% or higher that is considered undervalued.
I hope that answers your question? Cheers.
2016-03-14 23:57
@shinado, I trust that your valuation calculations are correct and it looks promising. However this article could be better if there was a report on the industry trend & growth potential for such machines & the company's core business. Among the first questions that come to mind are: shrinking branches, switch to online banking, rapid adoption of non-cash currencies, and even BNM is promoting the phasing out of cheques in favour of IBG. It would be good if you can provide an industry report, because, all might look good on the surface, but we do not know if this is a dying industry.
2016-04-04 11:18
@loveygramps Good point. I agree that such report would be good to better understand the industry. However, I do not know much of the banking/financial sector and don't even have access to resources for such reports. Hence, I can only write up analysis on what the company was able to do in financial terms.
Perhaps someday I might find a way in the future. Who knows? Cheers.
2016-04-04 19:27
Shinado, just came across yr article. Am a newbie and just starting out but age wise past 70. I find investing in GOOD stocks keep me going and puts the zip into my life. Thanks again
2016-05-15 11:03
Shinado, this is the fist time I learned such analysis of a company. Thanks a lot for your sharing, and hope to learn from you in future.
2016-05-15 23:34
Hey guys thanks for your feeback. I'm hoping to write more but unfortunately do not have the time in recent weeks. Will try to write whenever I can!
2016-05-16 10:13
Hi Shinado, the edge recently covered the stock in the top 10 ACE market listed stock and one of them was opensys. Well, I am still a newbie on this but I think the biggest issue is not the growth of the company but the liquidity of this share. It still take a lot of effort for this share to climb to main board to gain the momentum, nevertheless, all the fundamentals are pointing the positive direction, a bit of patience of 5 years will make a superb investment if this company continue to perform. I didn't buy any of this share (but most probably looking forward for) but I wish you all the best on your investment
2016-05-16 22:09
Hi, Shinado, do you have a blog. I am impressive with this article. I am interested in investment-related article. I believe I can learn more from you and you will be the best mentor.
2016-07-15 22:21
Hi Yong Jui Foo, I do not have a blog. I can't call myself a sifu or mentor because I am a learner just like you. I do share what I learned by myself or from others though. But I'm sure you can find other investment-related articles and here in I3investor is a good start.
Hopefully, I can find some time to write more articles in coming weeks or months. Thank you.
2016-07-20 09:56
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Probability
excellent presentation shinado...
you are really improving well.
I have not made a study by myself yet...but sure getting curious.
on the Cash yield, was is taken for TTM? Could you share the figures for TTM
and also the EV/EBIT for TTM...thanks :)
2016-03-10 14:03