Is Silverlake Axis Ltd Too Cheap To Ignore Now?

I recently ran a screen to find companies that have seen their share prices fall drastically over the past few months. One such company happened to be Silverlake Axis Ltd (SGX: 5CP).

The company has seen its share price fall from a peak of over S$1.20 back in mid-2015 to S$0.56 yesterday.

It’s likely that the current market downturn (the Straits Times Index (SGX: ^STI), which is down by nearly 30% from its April 2015 high) did contribute to Silverlake Axis’s share price decline. But, the firm’s shares really started collapsing only after allegations that it had been involved with accounting manipulations surfaced back in August 2015.

In terms of its business performance, Silverlake Axis has been doing well. From its fiscal year ended 30 June 2011 (FY2011) to FY2015, the company’s revenue has grown at a compound annual rate of 14%. Net income had done even better, climbing at an annual rate of 25%.

In the first-quarter of Silverlake Axis’s FY2016, it does not seem that growth is slowing down as well as the company experienced another 15% jump in net income.

In terms of its valuation,  the company is now offering a dividend yield of 6.5% (based on its annual dividend in FY2015) and trades at 16 times trailing earnings. The company has been generating strong free cash flow and still has a solid balance sheet that has RM390 million in cash and just RM2.7 million in capital leases as of 30 September 2015, according to S&P Capital IQ.

The importance of understanding the business

Silverlake Axis’s numbers look good. But, one important thing about investing, in my view at least, is that investors need to understand what they are investing in.

Being an enterprise software provider, the business of Silverlake Axis may not be easily understandable by most investors. What is the economic moat of the products of the company? How can the firm win market share from competitors? What determines the supply and demand for its products?

Also, can investors understand the allegations made against the company’s accounting practices? Are the claims legitimate and can investors trust the management team to uphold the interests of minority shareholders?

These are questions investors may want to think about first before even considering whether or not to invest in the company.

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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.