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OSIM and Silverlake Axis

Yesterday was an interesting day, not because I was happy at work, or my football team won, it was that 2 companies release their latest quarter results.

The first thing that we discuss these companies is that you will cite the frothy price, that you missed the company and you probably dismissed it.

Usually the reason why you considered the company expensive was due to how the price chart looks, relative to historical price trends.

There is seldom value placed on trying to size up the “goose”, finding out if the goose is golden or just a normal one (and hopefully its not a sick goose.

I think I am digressing. Here are 2 companies which just happen to report results on the same day. I will not say whether they are good companies or not, whether they are cheap or expensive. Try to draw your own conclusion.


OSIM is a life style company that most are familiar with in the region. We see their advertisements on TV for a long time. The company sets up shops around regional markets trying to influence a healthy lifestyle through their exercise and message equipment, health products through their GNC outlets and with the latest acquisition TWG Tea.

Announcement here

Scuttlebutt on the company at their outlets will make most of  us skeptical of their results. The outlets selling the exercise and message equipment are in high rental shopping malls and they are usually empty.

Whether we build up conviction to invest or not depends on how much we have suss out their business model.

Osim suffered greatly prior to the GFC when they invested in a US company Brookstone Inc. Since 2009, they have turned around their financial numbers. Profit grew from 24 mil to 101 mil, a 33% CAGR.

On my calculation, the last 5 years ROIC is great:

  • 2013: 86%
  • 2012: 66%
  • 2011: 75%
  • 2010: 107%
  • 2009: 52%

I would think with this kind of ROIC, the more outlets setup, the greater operation leverage they will achieve to their underlying profits. Because they own so little physical assets, and that capex is extremely low, this becomes a great FCF company.

The price has ran up a fair bit but PE at this point of calculation seem to be 20 times, an earnings yield of 5% of which they are payout out 35% as dividends.

20 times is not that expensive if you consider the past 5 years CAGR of 33%. Would this be repeated? Is looking at 5 years too short, you be the judge.

Silverlake Axis

Silverlake Axis Limited provides customized software solutions. The Company provides digital economy software solutions and services to the banking, insurance, payment, retail and logistics industries.

Technology solutions can be a rather competitive space. If you are to survive in this field, you will have competitors of your same size but also the big technology companies like IBM.

What sets Silverlake apart is that they operate in a niche segment. Maintenance is a recurring revenue and predictable business to be in. Unfortunately, the systems lifecycle is getting shorter and shorter, which means shorter maintenance cycle making it perhaps not as lucrative as in the past. A movement to the cloud in terms of operations have also changed the landscape.

Where Silverlake is niche in is that they working in the banking space, and these are critical systems, the customers tend to be more willing to place good dollars on something they value more and are less willing to change what is working.

And you can see this in their financial statements. The business have been consistently throwing out great free cash flow.

The recent result is a good example.

Usually, when revenue goes up, you would expect selling and distribution costs to go up in tandem. Not so. Their latest quarter selling and distribution costs actually went down 43% and administrative expenses down 22%.

That is crazy operation leverage. Perhaps an example of how high their switching cost or the moat they have that what is needed to generate more sales does not need to be invested.

The business is net cash and PE is at 30 times and EV/EBITDA is at 25 times.


These two businesses look to be very expensive. But they are similar in that they have a moat that provides them with abnormal cash flow generating capabilities. Judging them based on the traditional idea that “any thing that is more than 20 times PE is expensive and not attractive” becomes flawed. They are trading at that PE because market is pricing partly a superior business model. They lean closer to being a Golden Goose than a Sick one.

What would be a good price you would be willing to pay for a business like this. Would you based on price charts? Would you based on DCF, or would you based on PE.

Where is your margin of safety? And what is margin of safety to you?


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Thursday 8th of May 2014

Hi Drizzt,

One thing I like SIlverlake is they keep increasing their dividend and dividend payout ratio already up from 50~60% to recent quarter 80~90%. Frankly speaking, i also don't know how to evaluate the target price, i have friend using DCF that derive target price way below 70cents.


Thursday 8th of May 2014


What is your friend forecasting Silverlake EPS or FCF to grow at for the next 10 years. And what is the discount rate used.


Thursday 8th of May 2014

OSIM ROIC and CAGR doesn't make sense Silverlake operating leverage in reverse. Revenues dropped a little from FY2012 to FY2013. Selling and distribution increased from 7.8M to 9.9M Administrative increased from 33.4M to 35.4M What about forex and performance shares?


Thursday 8th of May 2014


I seem to have differed results when it comes to ROIC. I wonder if its due to the formula that i used that is wrong. essentially invested capial comes from Assets - Excess Cash - Current Liabilities.

As for operating leverage, A business that has a higher proportion of fixed costs and a lower proportion of variable costs is said to have used more operating leverage. Those businesses with lower fixed costs and higher variable costs are said to employ less operating leverage.

I think i might have got it wrong there. It should be less operating leverage

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