Silverlake hit by anonymous short selling report

Even as Noble Group is still nursing its wounds from scathing attacks, including from a short seller, software solutions provider Silverlake Axis has become the fourth company on the Singapore Exchange (SGX) in recent history to have become the target of short selling.

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Guanyu said…
Silverlake hit by anonymous short selling report

Lee Meixian
22 August 2015

Even as Noble Group is still nursing its wounds from scathing attacks, including from a short seller, software solutions provider Silverlake Axis has become the fourth company on the Singapore Exchange (SGX) in recent history to have become the target of short selling.

The anonymous report released on Thursday night continued to make its rounds on Friday leading Silverlake’s stock to fall by as much as 27 per cent to an intra-day low of S$0.615. This prompted the company to halt its trading immediately at 1.20pm.

By this time, the stock of Silverlake - a provider of digital economy software solutions and services to the banking, insurance, payment, retail and logistics industries - was at S$0.635, down 24 per cent. Some 22.9 million shares were traded on Friday, compared to just 6.4 million on Thursday.

The Singapore Exchange also queried the company on the “unusual price movements”.

The 42-page report, authored by someone under the moniker of “razor99”, recommended shorting the stock and placed a S$0.29 target price, 65 per cent below its Thursday closing price of S$0.84.

The anonymous author made several allegations in the report, picking especially on the “complex web of murky, private companies connected” to Silverlake that it said was “designed to confuse and deceive minority shareholders”.

Many of these are companies in which its founder and chairman Goh Peng Ooi is said to own stakes, making them “related parties” when transactions are made. And such related-party transactions make up a huge portion of the listed company’s revenue and expenses.

“The rationale and justification for these related-party transactions is (sic) flimsy and their existence creates significant potential for fraudulent abuse,” the report claims.

It is understood that this is not the first time that issues like these have surfaced. Analysts told The Business Times that the company had usually denied them, or said that it was working on becoming more transparent.

Derrick Heng, an investment analyst from Maybank, said: “These are private transactions, so they come under just one line of revenue number from interested party transactions in the financial statement, and a certain amount of costs that are attributed to these private entities, but beyond that, we don’t see anything.

“We’ve asked if the management can share more, or even that the companies can be consolidated into the listed entity. And they just said they will consider improving.”

In its latest report in May, DBS analyst Sachin Mittal downgraded the stock from “hold” to “fully valued” (or “sell” in non-financial-jargon).

DBS said that in FY14, contributions from related party transactions made up around 24 per cent of revenues; about 48 per cent of the sales growth over FY11 to FY14 also came from related party transactions.

Mr Mittal had other issues with the stock as well, which the short seller report also alluded to.

He called the stock’s valuations “too rich” (at an 18-per-cent premium to global peers) and operating margins abnormally high (around 55 per cent versus 20-40 per cent of large global peers). This, despite spending less than one per cent of its revenue on research & development (R&D), versus, say, Geneva-based Temenos Group’s 9 per cent.

Silverlake’s defence was that more innovative but riskier projects are taken care of by its related parties, thus saving its own R&D expenses.

Earlier, an investment website had claimed that the company could have engaged in irregular financial reporting, pointing to its previous related-party transactions and acquisitions. The article was taken down after Silverlake objected strongly to the allegations and said that it was seeking legal advice.

Market talk has it that the short selling report was a project work by students of a local university but somehow it got leaked online.
Guanyu said…
Jarick Seet, an analyst at RHB Investment Bank, does not believe that the company has been inflating its earnings artificially, given its strong cash flow.

“If it has been inflating its profit, its cash flow would not be strong enough to pay out sustainably high dividends... In 2014, it paid out 106 per cent of net profit as dividend, in 2013, 86 per cent, and in 2012, 61 per cent. And it has maintained a net cash position with little debt on its balance sheet.”

The anonymous report also highlighted that even though the company’s revenue and net profit have grown at a rapid pace, earnings per share have only increased at a 5.4 per cent compound annual growth rate due to frequent dilutive related-party deals.

Analysts said one way that Silverlake could fight such allegations is to show legal documents on related party transactions and give more detailed disclosures on such transactions including income statements of the private subsidiaries.

Silverlake CEO and group managing director Kwong Yong Sin was not able to respond to BT’s queries by press time.

SGX this week has urged companies under attack by short sellers to provide, as much and as quickly as possible, a full response so that shareholders have a complete picture to make informed decisions.

The two other companies that came under short selling attacks in recent history were Olam International and China Minzhong Food.

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