Making Sense of the Recent Short Attack against Silverlake Axis Ltd

Over the past few years, it seems that companies in Singapore’s stock market have been an attractive target for market participants who publish negative investing reports.

It wasn’t too long ago when commodities trader Olam International Ltd (SGX: O32) first found itself in the crosshairs of the short-seller Muddy Waters in 2012. Since then, there have been a slew of critical reports appearing, targeting companies like Sino Grandness Food Industry Group Ltd (SGX: T4B), China Minzhong Food Corporation Limited (SGX: K2N), and more recently, Noble Group Limited (SGX: N21).

(For more on the reports concerning the latter trio, see here, here, and here.)

Last week, another locally-listed firm joined the list and it’s none other than Silverlake Axis Ltd (SGX: 5CP), a Malaysia-based software company. Silverlake Axis, whose technological products, systems, and solutions serve many major financial institutions in the Southeast Asia region, is one of the most successful software companies that Malaysia has produced.

From the fiscal year ended 30 June 2005 (FY2005) to FY2015, Silverlake Axis has seen its revenue and profit jump five- and four-fold respectively. 

But, an investing report was published on 20 August 2015 in which the writer, who “may” be short Silverlake Axis’s shares (when you’re short, you’re betting that the price of a stock will fall), has likened Silverlake Axis to high-profile fraud cases in the past involving software companies like Longtop Financial from China and Satyam Computer Services from India. It’s a serious accusation.

According to the 42-page report, Silverlake Axis has huge related-party transactions (RPT) with private companies that are linked to its executive chairman and founder, Goh Peng Ooi. Moreover, these RPTs are huge, accounting for around a quarter of Silverlake Axis’ revenue and expenses. Some of the more serious accusations that are levelled against Silverlake Axis in the report include:

  1. Some RPTs are fake transactions that are purely used to inflate Silverlake Axis’s profit.
  2. Silverlake Axis had acquired and/or merged with a number of private companies that are held by Goh over the years. But prior to the corporate actions, the private companies had inflated their revenues and profits; this in essence results in Silverlake Axis overpaying for them.
  3. Goh has been enriching himself at the expense of Silverlake Axis’s minority shareholders.
  4. Goh’s accused of impropriety through the construction of a “complex and deceiving corporate structure” with Silverlake Axis.

Foolish Summary

The allegations made by the anonymous writer of the investing report is very severe. When the report was first published, Silverlake Axis’s share price saw a hefty 24% collapse the very next day on Friday, 21 August 2015.

Given the severity of the accusations, it will be surprising if Silverlake Axis does not take action against the writer and others who may be involved with the report. In a statement filed with bourse operator and regulator Singapore Exchange yesterday, Silverlake Axis mentioned that it’s currently seeking legal advice on the matter.

The company also commented in the same filing that it “will be engaging Deloitte Singapore to undertake an independent review of the allegations… referred to in the Report and to provide its finding and conclusions as to their veracity, which [Silverlake Axis] will publish in due course.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim does not own any companies mentioned above.